NBFCs may raise loan rates, fees to offset insurance income cap
Non-bank lenders and housing finance companies are expected to raise lending rates in response to proposed regulatory changes. This adjustment aims to offset potential income losses from caps on insurance distribution. Companies such as Bajaj Housing Finance and Home First Finance are considering changing their product mix and increasing fees. The Insurance Regulatory and Development Authority of…
Mumbai's non-bank lenders and housing finance companies are contemplating rate hikes, additional fees, and product mix changes to counterbalance a possible decrease in income from insurance distribution, according to industry professionals. This could lead to higher borrowing costs for some consumers, especially in affordable housing and other lucrative lending niches where lenders have more room to adjust loan pricing and fees.
Bajaj Housing Finance anticipates recouping part of the income loss through elevated processing charges and improved margins in its Sambhav affordable housing finance arm, as per managing director Atul Jain. However, in its prime housing-loan business, the lender expects only partial recovery through higher fees, productivity enhancements, and operational efficiencies.
Home First Finance, too, is contemplating adjustments in loan pricing and fees, coupled with a shift in the product mix. The company estimates that the proposed changes could erode its return on assets by approximately 35 basis points before mitigation efforts. Insurance distribution has become a significant revenue source for non-bank lenders, with Icra's study revealing it accounted for 8% of NBFC profit after tax in FY26, up from 0.8% in FY23.
For housing financiers, it represented 7.6% of PAT, compared to about 1% three years ago. Private banks had a comparable share of 6.8%, while public sector banks had a 2% share. The Insurance Regulatory and Development Authority of India (Irdai) has proposed significant reductions in commissions on credit-linked products, including caps of 2% of premium for single-premium credit-life insurance and 2.5% for multi-year credit-life policies in the first year.
The NBFC industry has raised concerns about the viability of credit-linked insurance distribution under the proposed commission structures, which have been around 45-49%. The Finance Industry Development Council has sought a five-year transition period to implement the caps, arguing that an immediate reduction could render the distribution channel commercially unviable.
Piramal Finance estimates that the proposed framework could impact FY28 return on assets by 18-24 basis points if implemented from April 1, 2027. The company is exploring lower sales incentives and product-level offsets to mitigate the impact.
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