IRDAI’s proposed commission caps could squeeze NBFC profits: Nuvama
IRDAI’s proposed commission caps may squeeze NBFC profits as lower distribution income could weigh on earnings, Nuvama said.
IRDAI’s proposed commission caps could put pressure on NBFC profitability, according to Nuvama.
NEW DELHI — IRDAI: Proposed curbs on insurance distribution commissions could squeeze fee income and pressure earnings for non-banking finance companies (NBFCs) and select private lenders from FY28, according to brokerage firm Nuvama Institutional Equities.
In its Q2FY27 results preview report, Nuvama highlighted that the Insurance Regulatory and Development Authority of India’s (IRDAI) draft consultation paper represents a key regulatory overhang for lenders heavily dependent on bancassurance and credit-life fee income.
IRDAI: Regulatory Overhang on Fee Income
The IRDAI paper proposes product-, channel-, and policy-specific commission caps, lower limits on management expenses, and strict curbs on the mandatory bundling of insurance policies with credit products. Stakeholders have been requested to submit feedback by October 25, leaving the final regulatory framework and timeline uncertain.
“Key concern is the impact on bancassurance and credit-life fee income, particularly for lenders where insurance distribution forms a meaningful share of PBT,” Nuvama noted.
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Based on FY26 financials, insurance distribution revenue accounted for a significant portion of pre-tax profits across several lenders:
NBFC Exposure: L&T Finance faces the highest earnings sensitivity, with insurance income making up 25.6% of FY26 PBT (0.78% of average assets), followed by Cholamandalam Investment and Finance at 16.3% of PBT. Lower exposure levels were noted for Bajaj Finance (6.9%), Tata Capital (5.3%), Mahindra Finance (4.7%), Aditya Birla Capital (4.1%), and Shriram Finance (2.6%).
Bank Exposure: IndusInd Bank is the most vulnerable among private lenders, with insurance income driving 79.3% of FY26 PBT, followed by IDFC First Bank (48.8%), Bandhan Bank (30.8%), Ujjivan Small Finance Bank (19.2%), and AU Small Finance Bank (14.3%). Large private lenders like ICICI Bank and public sector banks (PSBs) face a negligible impact.
Piramal Finance has indicated that an as-is implementation of the draft rules could reduce its FY28 Return on Assets (RoA) by 18–24 basis points, though management plans to partially offset the impact by adjusting customer interest rates. In light of these proposed caps and rate hike pressures, Nuvama has trimmed its FY28 earnings estimates for Mahindra Finance, L&T Finance, SBI Cards, Muthoot Finance, and CreditAccess Grameen.
IRDAI: Strong Q2FY27 Near-Term Outlook
Despite medium-term regulatory headwinds, NBFCs and banks are set to deliver robust earnings for the July–September quarter (Q2FY27), propelled by healthy loan demand and benign credit costs.
Nuvama forecasts combined profit after tax (PAT) for its NBFC coverage universe to jump 37% year-on-year (YoY) to ₹205 billion, driven by a 23% credit expansion and operating leverage. Earnings growth will be led by Bajaj Finance, Cholamandalam, L&T Finance, Shriram Finance, Piramal Finance, Aditya Birla Capital, and Tata Capital.
Coverage banks are projected to report an 18.8% YoY profit increase to ₹891 billion:
Private Sector Banks (PVBs): Estimated PAT of ₹523 billion (+22.3% YoY), aided by lower credit costs and a favorable base.
Public Sector Banks (PSBs): Estimated PAT of ₹368 billion (+14.2% YoY), constrained by weaker treasury performance, though partially cushioned by one-off gains from National Stock Exchange (NSE) stake sales.
IRDAI: Rate Hikes and Margin Dynamics
The earnings outlook also factors in the Reserve Bank of India’s (RBI) recent 25 basis point repo rate hike to 5.50% and its stance shift to ‘calibrated tightening’. Nuvama projects a cumulative 50–75 basis points of rate hikes in FY27.
A 50 bps rate hike is expected to expand Net Interest Margins (NIMs) on outstanding loan books for banks—led by Axis Bank (+24 bps), HDFC Bank (+19 bps), ICICI Bank (+18 bps), and State Bank of India (+15 bps)—as floating-rate assets reprice faster than deposits. Conversely, NBFC margin pressure may be delayed until Q4FY27 due to ample systemic liquidity.
