HDFC Bank, IndusInd Bank: Banking, financial stocks tumble after IRDAI proposal; NIFTY Bank tanks over 1,130 points

Shares of banking, financial services and insurance companies came under heavy selling pressure on Thursday, September 24, souring investor sentiment that was already dampened by weak global cues amid a surge in crude oil prices.

Banking and financial stocks were hit hard after the Insurance Regulatory and Development Authority of India (IRDAI) proposed sweeping changes to insurance distribution, including tighter Expense of Management (EoM) limits and lower commission caps.

At 2:21 PM, the NIFTY Bank index was down over 2%, or 1,135.65 points, with 13 out of 14 constituents declining. The fall in the NIFTY Bank index was among the key factors behind the sharp decline in the benchmark indices on the NSE.

Why did banking and financial stocks take a hit?

While the IRDAI proposals are aimed at insurers and insurance distribution companies, banking stocks also came under pressure as several banks distribute insurance products through their bancassurance channels.

Banks typically earn fees or commissions for distributing insurance products to their customers. Therefore, any reduction in the amount that can be paid to distributors could put pressure on bancassurance income.

However, the impact is expected to vary across banks depending on their product mix, distribution model and reliance on insurance-related fees.

Jefferies said the proposals would be slightly negative for banks' bancassurance fees, particularly for credit-protection products. These products are often sold as single-premium policies and currently carry relatively high commissions.

Based on FY26 bancassurance commissions relative to normalised FY27 profit, Jefferies said IndusInd Bank and IDFC First Bank have higher exposure, while ICICI Bank and PSU banks have lower risk.

Macquarie also sees differences in the potential impact across lenders. It said Axis Bank and HDFC Bank could be more affected than SBI, ICICI Bank and Kotak Mahindra Bank.

Why are insurance stocks under pressure?

IRDAI has proposed a recalibration of the EoM framework, with lower limits to be introduced through a phased glide path.

For life insurers, the EoM limit is proposed to move towards 12.5% over five years, while for general insurers, the limit is proposed to decline to 20% over five years.

What does this mean?

In simple terms, IRDAI wants insurers to reduce the amount they spend on running and distributing their insurance business. The proposed changes would gradually bring the expense limit for life insurers down to 12.5% and for general insurers to 20% over five years.

The regulator has also proposed changes to commission structures, with limits to vary depending on the insurance segment, line of business, distribution channel, product complexity and the effort involved in selling and servicing a policy.

HSBC said the proposed EoM limits are stringent and, if implemented, could have wide implications across insurers, brokers and lenders. The brokerage said SBI Life appears relatively less impacted, while HDFC Life and Max Financial Services could see a higher potential impact.

Macquarie, meanwhile, expects LIC and SBI Life to be relatively insulated, while noting that higher caps for tied agents could shift the economics towards channels involving greater selling effort.

What does it mean for insurance distributors?

The proposed commission changes are also important for insurance distributors, although the impact is likely to be more direct for companies whose revenues are closely linked to distribution commissions.

Jefferies said the consultation paper proposes one-half to one-third cuts in commissions across health, term and motor insurance and flagged this as a risk for PB Fintech and Turtlemint.

A 10% cut in new-business commission rates could translate into a 10-12% decline in their earnings, according to the investment firm.

How stocks were faring

HDFC Bank was down nearly 2% at ₹730.15, while Axis Bank was trading over 5% lower at ₹1,179.90 on the NSE. SBI was also down 1.75% to ₹976.70, and IndusInd Bank tumbled 4.38% to ₹917.30 on the NSE.