Banca cap may impact banks' net profit by 1-2%, says IIFL Securities

It could shave off 15-30% of banks' fee income that they earn by selling insurance

If bancassurance caps are introduced by the Insurance Regulatory and Development Authority of India (Irdai) to curb mis-selling, it could potentially shave off 15-30 per cent of bank’s fee income that they earn by selling insurance and have a bearing on their net profit by 1-2 per cent, said IIFL Securities note on Friday.

 

The firm added that major banks such as Axis Bank, Kotak Mahindra Bank, State Bank of India, and HDFC Bank could be among the most impacted lenders.

 

“…banks’ bancassurance income pool of $1.7 billion is growing at 25 per cent compounded annual growth rate (CAGR) in the last three years, with higher contribution to revenue for private banks. Our analysis shows banks’ banca fee income can decline by 15-30 per cent and profit after tax (PAT) can be impacted by 1-2 per cent if banca caps are introduced, but the actual impact can be mitigated if there is a phased implementation,” the report mentioned.

 

Bancassurance has generated more than Rs 14,500 crore commission income for the banking sector in India, representing 2 per cent of their total revenue in financial year 2024 (FY24).

 

Contribution of bancassurance to banks’ overall fee income and total revenue is higher for private banks at 10 per cent and 2 per cent respectively, versus 7 per cent and 1 per cent for state-owned banks, the report said, adding that despite most private banks following an open architecture policy, the salience of banca income is higher for them because they continue to remain a dominant distribution channel for their insurance subsidiaries.

 

Additionally, in a separate report, IIFL Securities cautioned that any bancassurance caps that Irdai would likely introduce could impair the insurance industry’s ability to sell insurance, unless it comes with a long enough glide path of 3-5 years, which gives them enough time to build alternate distribution channels.

 

“…mis-selling may not be limited to just the banca channel (and could be prevailing in agency too), in which case, these caps may not fully resolve the issue and may be difficult to implement, as seen in the UPI payment market share as well,” said IIFL Securities note.

 

According to the report, among insurers the most impacted would be SBI Life Insurance, Max Life Insurance, HDFC Life Insurance, ICICI Prudential Life Insurance.

 

Around one-third of individual life insurance business is sourced via banca distribution channel. While the banca share for private insurers is higher at 53 per cent relative to 3 per cent for public sector insurers.

 

Reports suggested that Irdai is likely to bring in regulations to limit the overdependence of life insurance companies on their parent banks for business sources through bank channels.

 

Bancassurance is a partnership between banks and insurance companies to sell insurance products through bank branches. In October 2023, Irdai formed a task force to review the existing bancassurance framework and improve its efficiency amid complaints of mis-selling or forced selling of policies.

 

Recently, both the finance minister and the Irdai chairman expressed concerns about mis-selling or forced selling of insurance products via banks and stressed the need to restore customer confidence in the system while urging lenders to focus on their core banking services.

 

In FY23, around 50 per cent of customer grievances against private Insurers (20 per cent for overall industry) were for unfair business practices. However, this constituted a meagre Rs 0.1 per cent of new policies sold, the report said.