Proposed insurance commission caps could hit smaller Indian banks harder

what happened

Indian banks are bracing for a sizeable drop in fee income because of commission caps the insurance regulator Irdai has proposed. Moody's reports that smaller and mid-sized lenders would be hit hardest: in some product categories losses could reach 70%, and at some of these banks more than half of bancassurance income could disappear.

Irdai's consultation paper of 23 September proposes product-wise commission limits and a ban on making insurance compulsory alongside loans. Single-premium life policies sold with loans would face a 2% cap. Today such commissions are set through bilateral deals with insurers, and on credit-life products they can reach 45%, according to industry estimates.

Larger banks say they can absorb the losses. Insurance income made up 7.3% of HDFC Bank's pre-tax profit in FY26, against 0.6% at ICICI Bank and 30.8% at Bandhan Bank. Lenders plan to offset the gap through higher volumes, deeper penetration in smaller towns and growth in fee lines such as mutual funds and trade finance.

why it matters

For markets, the key issue is not the revenue total but how much of smaller banks' profit depends on insurance commissions, which is where the hit becomes material. These are still proposals in a consultation paper, so the final rules remain unknown.

market impact

Small Indian banks: lower commissions squeeze non-interest income and pressure profits

• ▼Bandhan Bank shares pressure down — insurance income is about 31% of profit, and the caps would shrink that stream

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