Archive for category: Financial Services

– Team Finserv | finserv@vinodkothari.com

RBI has issued Reserve Bank of India (Non-Banking Financial Companies – Undertaking of Financial Services) Second Amendment Directions, 2026 (‘UFS Amendment Directions’) on June 15, 2026. The RBI also issued the Reserve Bank of India (Non-Banking Financial Companies – Responsible Business Conduct) Second Amendment Directions, 2026 (‘RBC Amendment Directions’) under the RBI press release for issuance of Amendment Directions on ‘Advertising, Marketing and Sale of Financial Products and Services by Regulated Entities’. Earlier draft Reserve Bank of India (Non-Banking Financial Companies – Undertaking of Financial Services) Amendment Directions, 2026 (‘Draft Direction’) were issued as a part of the Draft Amendment Directions for Advertising, Marketing and Sales of Financial Products and Services by Regulated Entities. 

By way of Highlights, the UFS Amendments introduce a unified framework for agency business of banks and NBFCs, and referral activities of banks. Specifically, the Amendments provide that agency/referral activities will be undertaken without risk participation, and in case of referral, the bank will be limited to simply connecting the customer with the external provider (TPPSP), and will not be involved in the sale process. The physical or electronic machinery of the bank will not be used for third party product sales.

Our interpretation of the regulated entity’s (RE’s) participation being on no-risk basis is that if the agency or referral fees are linked with the profits or performance of the product/service offered by the third party, the agent or referring entity indeed gets subjected to risk.

We also give specific details about insurance distribution, a lucrative add-on income opportunity for most regulated entities.

Unified Framework for Agency Business

• RBI has formally defined “Agency Business” as an arrangement where a Bank/ NBFC acts as an agent of a third-party product or service provider (TPPSP) for the distribution of financial products and services. Thus, banks/NBFCs under agency business can only distribute financial products or services. 
• The RBI has not covered non-financial products and services under the purview of the UFS Directions, however, the same is not restricted in case of NBFCs.
• The distribution of financial products and services would include marketing, sales, promotion, customer onboarding support, grievance facilitation and after-sales services.
• The arrangement must be undertaken without any risk participation by the NBFC.

Agency versus referral

• A principle-based distinction is required between Agency Business and Referral Services. Refer to our article discussing this in detail- Referral or Representation? The Fine Line Between LSP, DSA and Referral Partner – Vinod Kothari Consultants. 
• For such TPPS that require higher and continuous customer interactions, the Agency Business arrangement may be used instead of Referral Services. However, REs may undertake only such third-party product or services under referral route where continued customer interactions such as distribution, grievance redressal, post sales services are not required to be undertaken. 

Undertaking Insurance Agency business by Banks/NBFCs/HFCs

• Banks may act as an insurance broker departmentally
• NBFCs and eligible HFCs may undertake insurance distribution under the corporate agency or broking model without prior RBI approval.
• Prior approval/registration from IRDAI and compliance with applicable IRDAI regulations remain mandatory. Here, it may be noted that the RBI NOC is generally required at the time of making an application to IRDAI.
• Insurance distribution must:
  • Be undertaken on a fee basis;
  • Involve no risk participation;
  • Be clearly disclosed to customers by disclosing the products on the website of the NBFC;
  • Be supported by robust grievance redressal mechanisms of the insurer. The NBFC may facilitate the redressal of grievances.
• Earlier, the Reserve Bank of India (Non-Banking Financial Companies – Undertaking of Financial Services) Directions, 2025 (‘UFS Direction’), provided that no incentive (cash or non-cash) should be paid to the staff engaged in insurance broking/ corporate agency services by the insurance company. The same has now been deleted. However, it may be noted that this requirement has been covered under para 101U of the RBC Amendment Directions.

Does Insurance Distribution include  a lender acting as master policyholer?

The UFS Amendment Directions uses the terms ‘Agency Business’ to mean an arrangement under which an NBFC acts as an agent of a third-party product or service provider (TPPSP), without risk participation, to facilitate the sale of the latter’s financial products or services (e.g., insurance, mutual fund, pension fund, etc.) to its own customers Para 32 clarifies that an NBFCs intending to undertake insurance distribution can do so only in the capacity of a Corporate Agent (“CA”) or an Insurance Broker, in accordance with the applicable regulations issued by the Insurance Regulation Development Authority of India (‘IRDAI’). This disallows any unregulated or informal distribution arrangements, including informal referral models or structures that may resemble the outsourcing of distribution without appropriate licensing.

The question arises as to whether NBFCs may act as a master policyholder for group insurance or through Insurance Self-Network Platforms (‘ISNP’), in accordance with the applicable IRDAI regulations.

In our view, the amendment does not restrict the NBFCs from acting as the Master Policy Holder for group insurance policy covering lender-borrower groups, as permitted under the IRDAI_Master_Circular_on_Protection_of_Policyholders_interests_2024 as while acting as a master policyholder, the NBFC cannot draw any commission from the insurance company, it solely acts as a policyholder for the benefit of its customers. In this capacity, the NBFC facilitates enrolment, premium collection, and claims support, without undertaking solicitation in the capacity of an agent or broker. 

With respect to ISNP Platforms, only insurance intermediaries are permitted to take registration for operating an ISNP. Therefore, in our view NBFCs shall still be permitted to operate ISNPs. 

Further, the recent Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act, 2025 has introduced the concept of Managing General Agent (“MGA”) (which is still not implemented by IRDA) by including the same within the definition of “insurance intermediary”. Given that the MGA construct involves undertaking core functions such as underwriting support (assessment of risk only), product design, and distribution facilitation on behalf of insurers, it may fall within the broader ambit of “insurance distribution business”. While the regulatory contours around MGAs are still evolving, NBFCs have not been expressly restricted from acting as MGAs via this amendment, subject to clarity from the IRDAI on permissibility, registration requirement etc.  Read our article on Managing General Agents here.

No Routing of Funds through the NBFC/HFC

The UFS Directions earlier provided that the premium shall be paid by the insured directly to the insurance company without routing through the NBFC. This requirement has now been deleted under the present UFS Amendment Directions. It may however, be noted that Section 64VB of the Insurance Act, 1938 provides that, 

Where an insurance agent collects a premium on a policy of insurance on behalf of an insurer, he shall deposit with, or dispatch by post to, the insurer, the premium so collected in full without deduction of his commission within twenty-four hours of the collection excluding bank and postal holidays.

Accordingly, in case the NBFC/HFC acts as the corporate agent and collects any insurance amount, the same must be deposited with the insurance company within a period of 24 hours. 

Enhanced Disclosures in case of undertaking insurance agency business

The UFS Amendment Directions introduce an explicit requirement for NBFCs to make clear, upfront disclosures to customers that insurance distribution activities are undertaken strictly on a fee-based model and without any risk participation. Unlike the earlier framework where disclosure obligations were largely confined to financial statements (such as notes to accounts) and did not necessarily extend to customer-level communication at the point of sale. While the quantum or percentage of fees is not required to be disclosed, an appropriate disclaimer should be incorporated in the relevant loan documentation and/or on the website/ application through which loan journey is conducted, clarifying that the NBFC does not assume any risk participation in the insurance product and is acting solely in the capacity of an agent for the insurer.

Illustrative Disclaimer- “The Company acts solely as an agent of the insurer for distribution of insurance products. The Company does not underwrite or assume any insurance risk, and all claims, benefits, and liabilities under the insurance policy are the sole responsibility of the respective insurer.”

Mutual Fund Distribution Framework Revised

• NBFCs may distribute mutual funds subject to:
  • Compliance with applicable SEBI regulations and code of conduct;
  • Compliance with the RBC Directions;
  • Distribution being undertaken solely on a fee-based, non-risk participation basis and with upfront disclosure to the customer.
• Mutual fund houses whose products are distributed must maintain robust grievance redressal systems. The NBFC may also facilitate the redressal of grievances. 
• MF products should be clearly disclosed to customers by disclosing the products on the website or other digital channels of the NBFC.
• Nothing has been specifically provided for Banks in this regard

Pension Distribution / NPS Services

• Eligible NBFCs (other than Base Layer NBFCs) meeting prescribed CRAR requirements and having reported profits in the previous financial year may act as Points of Presence (PoPs) for NPS.
• Registration with PFRDA remains mandatory.
• Activities must be undertaken on a fee basis without risk participation and in compliance with RBI’s RBC Directions and PFRDA guidelines.

Referral business in case of Banks

• A specific definition of “Referral Services” has been introduced to mean an arrangement under which a bank may refer its customers to a TPPSP by making available information about the financial products or services offered by the TPPSP. This definition has not been introduced in the case of NBFCs/HFCs.
• Banks may refer customers only to products and services regulated by financial sector regulators and must comply with the instructions of the relevant regulator.
• Banks may market and refer the TPPS to their customers, but cannot sell under the referral arrangement. This should be made explicitly clear upfront through a disclaimer to the customers.
• The name or brand of the bank shall not feature in any of the product/ service documents. This ensures that customers do not misconstrue the product as being offered or backed by the bank.
• Banks must publicly disclose the list of TPPSPs and products covered under referral arrangements on their website, mobile application and other digital banking channels.
• Product onboarding, servicing and other TPPS-related processes cannot be integrated into the bank’s platform. The bank may only provide a link redirecting the customer to the TPPSP’s platform.
• Banks must undertake proper due diligence before entering into referral arrangements with TPPSPs. Particular emphasis is placed on assessing reputational risks associated with the TPPSP.
• Banks must ensure that the TPPSP has robust customer grievance redressal mechanisms in place before referring customers.

Grievance Redressal Mechanism

Under the erstwhile IRDAI (Registration of Corporate Agents) Regulations, 2015, corporate agents were permitted only to provide guidance and advisory to customers on issues arising during the course of an insurance contract. However, pursuant to the IRDAI (Protection of Policyholders’ Interests, Operations and Allied Matters of Insurers) Regulations, 2024, it has been mandated that every insurer and distribution channel shall establish robust procedures and effective mechanisms for the efficient and timely resolution of policyholder and/or claimant grievances.

In alignment with the above, the RBI, through its UFS Amendment Directions, has required NBFCs to ensure that the insurance companies whose products are distributed by them have adequate and effective customer grievance redressal mechanisms in place. Additionally, NBFCs may facilitate the redressal of such grievances.

Policy Mandate

The UFS Amendment Directions proposes to delete Para 6 of the UFS Direction, which requires NBFCs to put in place a broad Board-approved policy governing the distribution of third-party financial products, including insurance products. A closer reading indicates that the change is primarily structural rather than substantive, as the underlying policy requirement has already been added within the RBI’s RBC Amendment Directions, through the insertion of Para 101A, which mandates every regulated entity to adopt a comprehensive policy covering advertising, marketing, and sales of both its own and third-party financial products and services. 

It is also relevant to note that, independent of RBI requirements, sectoral regulators already mandate similar requirements. For instance, IRDAI requires corporate agents to maintain an open architecture policy and a grievance redressal policy. As such, most NBFCs engaged in these activities are likely to have comparable policies already in place. Consequently, we understand that where an NBFC has already adopted policies to comply with the RBC Amendment Directions or applicable sectoral regulations, those frameworks would adequately satisfy the regulatory expectation.