Banca channel for PSB-led life insurers slows in FY25 as incentives dry up

A renewed focus on core business, discontinuation of incentives for employees, and customer movement to digital purchases of insurance are the key reasons for the decline

Growth in the bancassurance channel for life insurance companies backed by state-owned banks has slowed in FY25 compared to last year, due to a change in incentives offered by some of the lenders as these banks are now renewing focus on their core business.

 

According to industry estimates, growth in the bancassurance channel of life insurers backed by public sector banks (PSBs) slowed to 6 per cent in FY25, with growth in March slowing to just 2 per cent. In FY24, the growth rate was 7 per cent.

 

Similarly, growth in the bancassurance channel of private banks-led life insurers was healthy at 15 per cent in FY25, but grew by just 7 per cent in March 2025. Last fiscal, growth in this channel was 8 per cent. 

 

 “There is a marginal drop in growth of PSU bank-led insurance companies due to slowdown in PSU bancassurance business owing to changes in the incentive schemes and score cards for the bank employees for selling insurance,” said the CEO of a private life insurer.

 

“State-owned banks do not really have a concept of incentives for their employees directly for selling insurance products. However, earlier there were some banks that were giving considerable commissions or some rewards along with other incentives. Now, they have totally stopped it," a senior PSB official said, on condition of anonymity. "Also, RBI has asked banks to focus more on their core business and insurance is more of our customer service business. This is likely to have resulted in some slowdown.”

 

Growth in the bancachannel for some state-owned banks was in the low single digits, including for Punjab National Bank, Canara Bank, and Union Bank of India. State Bank of India (SBI), Bank of Baroda, and Bank of India reported double digit growth in the banca channel. 

 

Misselling issues ring alarm bells at the top

 

There have been concerns regarding mis-selling of insurance products by banks and both Finance Minister Nirmala Sitharaman and Insurance Regulatory and Development Authority of India (Irdai) Chairman Debasish Panda have flagged the issue during an SBI Conclave in November 2024.

 

The insurance regulator had also formed a task force to review the existing bancassurance framework and improve the efficiency amid complaints of mis-selling or forced selling of policies. 

 

At the conclave, the finance minister had asked bankers to focus on their core business and avoid mis-selling of insurance policies, pointing that this often also indirectly leads to increasing cost of borrowing for bank customers.

 

Consequently, said another bank official, some PSBs have realigned their strategies and are now focusing on their core business. They have also reduced certain incentives offered to their employees. Although generally, commission for added services like insurance and mutual funds are offered to banks, some lenders used to give incentives to employees, a practice that has now been discontinued.

 

However, according to another insurance official, the slowdown has been triggered primarily by the change in customer preference who are now buying insurance policies through digital channels, leading to fewer footfalls at bank branches.

 

“There has been a slowdown in the banca business of PSU banks led insurance companies in the past one-and-a-half years. But this change is more of a structural pattern. The footfalls into banks have come down which has also resulted in slowdown in this business. We have to find a digital solution to counter it," a life insurance official said. "The banks have put checks and balances including video pre-insurance verification call (PIVC) to prevent mis-selling. The banks have also undergone changes to counter the mis-selling concerns raised.”

 

According to analysts, if distribution by bank partners slows down, smaller insurance companies will have to diversify to other channels since the bigger bank-led insurance companies already have a diversified channel mix.