IRDAI's proposal to cut insurance commissions could significantly impact banks' earnings. To compensate, banks are focusing on mutual funds, foreign exchange, trade finance, and other financial services.

Banks will not be able to forcibly sell insurance along with loans.

Revenue from selling insurance policies is a key source of income for banks, but the potential for change in this business is increasing. A new proposal from the insurance regulator, IRDAI, could impact bank commissions. Consequently, banks are strategizing to maintain their revenue streams through mutual funds, foreign exchange trading, and other financial services.

According to Bandhan Bank Managing Director and CEO Partha Pratim Sengupta, if the proposal is implemented, the bank's annual revenue from third-party products could decline by approximately ₹200 crore. The bank is now focusing on increasing revenue from mutual fund distribution, wholesale banking, trade finance, and foreign exchange services. There are also plans to expand insurance distribution in smaller cities.

What is the new proposal of IRDAI?

The Insurance Regulatory and Development Authority of India (IRDAI) has issued a consultation paper to reform the insurance distribution system. It proposes setting commission limits based on different insurance products and the channels through which they are sold. Changes are also proposed in the management and distribution expense limits for insurance companies. This could impact banks that earn commissions by selling life, health, and general insurance policies to customers.

Strategy of AU and IDFC FIRST Bank

AU Small Finance Bank is preparing to boost revenue from foreign currency transactions, credit cards, and trade finance. IDFC FIRST Bank, meanwhile, is looking to limit losses by saving on funding costs on foreign currency deposits, a potential increase in interest rates, and expanding its product agency business.

Axis Bank expects sales to increase.

Axis Bank is considering increasing insurance policy sales and adjusting its product mix to offset a potential reduction in commissions. The bank believes that lower insurance prices may encourage more customers to purchase policies. This could offset some of the impact of commission reductions by increasing sales volume.

HDFC Bank is assessing

HDFC Bank is also assessing the impact of the proposal. The bank believes the proposed commission reduction is significant. However, it also sees the potential for an increased customer base and longer policy tenure due to lower insurance costs. Currently, these changes are at the proposal stage. The impact on bank earnings will only become clear once the final rules are issued.

Government banks may also be affected.

According to the Central Bank of India, if the proposal is implemented, its insurance distribution fees could decline by approximately 33 percent. Canara Bank, meanwhile, estimates a potential impact on life insurance distribution revenue of ₹120 to ₹145 crore annually. The impact across all distribution businesses is expected to be no more than ₹200 crore, according to the bank.