NBFCs eye rate hikes, higher fees to offset insurance income hit

Mumbai: Non-bank lenders and housing finance companies are looking at increasing lending rates and loan processing fees besides changing their product mix to offset a potential decline in insurance distribution income under proposed regulatory caps, industry executives said.

The move could raise borrowing costs for some customers, particularly in affordable housing and other relatively high-yield lending segments where lenders have greater flexibility on loan pricing and fee corrections. Bajaj Housing Finance, for example, said it expects to recover part of the income loss through higher processing charges and lending margins in its affordable housing finance business Sambhav.

"In Sambhav segment, some offset will happen through the higher processing fees and a bit of a higher margin," managing director Atul Jain told analysts.


In its prime housing-loan business, however, the lender expects only part of the impact to be recoverable through higher fees, productivity improvements and operating efficiencies.

Home First Finance is similarly considering changes in loan pricing and fees alongside a shift in the product mix. "We have multiple levers to make up the 20 basis points," managing director Manoj Viswanathan said, referring to the residual impact the affordable housing financier expects after potential regulatory concessions. These include increasing the share of higher-yielding loans against property, undertaking more loan assignments and making "a slight change in the pricing or slight change in the fee," he said.

Home First Finance estimates that the proposed changes in insurance distribution business could reduce its return on assets by about 35 basis points before mitigation.

Insurance distribution has become an increasingly important source of fee income for non-bank lenders. An Icra study of 10 large NBFCs and HFCs showed insurance distribution income was equivalent to 8% of NBFC profit after tax in FY26, up from just 0.8% in FY23. For housing financiers, it represented 7.6% of PAT, against about 1% three years earlier. The comparable share was 6.8% for private banks and around 2% for public sector banks.

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The Insurance Regulatory and Development Authority of India (Irdai), in a recent consultation paper on recalibrating insurance distribution economics, has proposed steep cuts in commissions on credit-linked products, including a ceiling of 2% of premium for single-premium credit-life insurance and 2.5% in the first year for multi-year credit-life policies.

For credit-linked health insurance distributed by lenders, the proposed cap is 5% on the first sale. At present, payouts on credit-linked insurance are determined through commercial arrangements between insurers and distributors. Single-premium credit-life policies carried an average commission of about 22% in FY25, while effective payouts on some group credit-life products distributed through NBFCs have been around 45%. The NBFC industry has cited prevailing commission structures of about 45-49%.

The Finance Industry Development Council, representing NBFCs, has sought a five-year transition period to implement the proposed caps, arguing that an immediate reduction could make credit-linked insurance distribution commercially unviable.

Piramal Finance estimates the proposed framework could have a gross 18-24 basis-point impact on FY28 return on assets if implemented from April 1, 2027. It is also evaluating lower sales incentives and other product-level offsets.

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Managing director Jairam Sridharan said even if Piramal manages to mitigate around half of the gross impact, the remaining drag would still be "meaningful."

Shriram Finance, in contrast, expects a relatively limited impact because insurance income forms a smaller portion of its earnings. The company earned about ₹350 crore in insurance commissions last year and estimates the proposed framework could reduce this by around ₹100 crore.