Section 10 of IRDAI's September 23 consultation paper proposes that banks and NBFCs registered as insurance distribution entities cannot compulsorily bundle insurance with their products and services, including loans. A package would still be allowed only where there is a specific and demonstrable benefit to the customer, and even then three safeguards apply: the borrower must be told the interest rate with and without the insurance, must not be forced to buy the policy from that particular lender, and must pay the premium separately and directly instead of having it deducted from the loan amount. Comments are due by October 25, 2026.
Context: why the regulator is targeting loan-linked cover
Loan-tied insurance is one of the highest-payout lines in the business. The same paper proposes capping single-premium credit life commission at 2 percent, against current effective payouts that IRDAI's data puts at around 45 percent for single-premium group credit life, with NBFC channels near 42 percent. IRDAI also explicitly discourages packaging health benefit covers with home or motor loans against critical illness risk as cost inefficient for borrowers. The economics are simple: when commission is that large, the product gets sold because it pays, not because it fits the borrower.
Implication: what changes for borrowers and lenders
- Borrowers: the ability to take a loan without buying a lender-sold policy becomes the default right, and the true cost of credit becomes visible because the rate must be quoted both ways.
- Lenders: analysts estimate a 12 to 15 percent hit to profit before tax for some NBFCs if the proposals are implemented as drafted, and bancassurance fee income is a meaningful line for private banks.
- Insurers: credit life volumes shift away from point-of-sale capture at lending counters toward renewals and direct channels.
Action: what to do if your loan comes with insurance
Ask for the written interest rate with and without the insurance in the same message. Decline the insurance and see if the loan offer stands. If you do want the cover, pay the premium yourself from your own account rather than letting it ride inside the loan principal, and compare the same policy bought directly. If a lender insists that insurance is mandatory for the loan, that is a complaint worth filing on the IRDAI Bima Bharosa portal today, and the proposed rule would make the ban explicit. Watch for the final framework after the consultation closes on October 25.