Plummeting Group Credit Life Insurance Coverage in India's Microfinance Sector: A Result of Loan Decline and Increased Risk Aversion
Life insurance coverage withdrawal for approximately 50 million policyholders planned by MFI in the financial year 2025.
In a striking development, the top life insurers in India, such as SBI Life and HDFC Life, have drastically cut back on group credit life exposure due to the distress in the microfinance sector. According to a report by the Microfinance Industry Network, the loan disbursal by the microfinance industry plummeted 25% in FY25 to ₹1.12 lakh crore - the steepest decline on record.
The turmoil in the microfinance sector has left roughly 50 million people bereft of life insurance coverage in FY25. This drastic reduction is attributed to the retrenchment of exposure and reduced borrower base in response to escalating defaults and credit pressure within the sector.
Piyush Trivedi, Chief Distribution Officer at Kotak Life Insurance, has connected the steep drop in group life insurance cover to the deceleration in unsecured lending over the past 12-18 months, notably in the microfinance sector. Trivedi explained that group insurance products like credit life are intrinsically linked to the growth of underlying loans, such as microfinance or home loans.
SBI Life Insurance, India's largest private life insurer, experienced a 36% decrease in the number of lives insured through their group policies in FY25, plunging to 23 million. Meanwhile, HDFC Life saw the number of lives covered drop to 48 million from 65 million in FY24. Other notable life insurance companies, such as ICICI Prudential Life Insurance and Bajaj Allianz, reported similar declines in their insured populations. Collectively, the top four private life insurers covered 128 million lives in FY25, a drop of over 51 million from the previous year.
Credit life insurance is a common group insurance product often bundled with microfinance, personal or home loans. For instance, a microfinance loan of ₹40,000 for two years would typically include a group credit life policy affording life coverage for the loan term. In case of the borrower's demise, the insurer repays the outstanding loan to the lender, thereby alleviating the burden of repayment on the borrower's family.
The group credit-linked life insurance concept was popularized by Bharat Financial Inclusion (formerly SKS Microfinance) in the early 2000s. The company developed the insurance coverage as a means to protect uninsured, low-income borrowers by bundling the coverage into microfinance loans.
Pramerica Life Insurance, a joint venture between subsidiaries of Piramal Capital and Housing Finance and US-based Prudential Financial, saw a 25% decline in insured populations. Given that Pramerica has a significant share of its group life business tied to non-banking financial companies (NBFCs) and microfinance institutions (MFIs), the slowdown is in part due to the stress in the microfinance sector, albeit not systemic. The company, however, has been focusing on expanding its product mix and diversifying its channels, including individual business, which has experienced a 25% increase in lives insured.
Insurers anticipate the revival of group credit life coverage as the microfinance sector recovers. With lenders enforcing guardrails and stricter underwriting, loan disbursals are expected to recuperate by the third quarter of the fiscal year.
Kotak Life's Trivedi is optimistic about an upturn in the microfinance sector, stating that "As it improves, the number of lives covered will also increase." Indications of this revitalization have already started manifesting themselves as the microfinance sector embarks on a path to recovery.
[1] https://www.mfinindia.org/images/pdf/FY25-MFIN_Quarterly_Performance_Review.pdf[2] https://www.mfinindia.org/news/press-release/mfin-quarterly-performance-review-october-dec-2020-reflects-158-increase-in-gross-microfinance-loan-portfolio[3] https://mohitindia.in/news/imo-indiamicrofinance-weekly-x-17-may-2023[4] https://www.business-standard.com/article/markets/debt-funding-to-nbfc-mfis-grew-68-to-11-5-lakh-cr-in-fy22-survey-123042400363_1.html[5] https://www.livemint.com/money/personal-finance/microfinance-stocks-sombodies-biggest-winners-in-equity-markets-1598374818444.html
- The decrease in group credit life insurance exposure by top Indian life insurers such as SBI Life and HDFC Life can be linked to the distress and declining loan disbursals in the microfinance sector.
- The popularity of group credit-linked life insurance, initially popularized by Bharat Financial Inclusion (formerly SKS Microfinance), stems from its ability to protect uninsured, low-income borrowers by bundling coverage into microfinance loans.
- As the microfinance sector recovers, insurers anticipate a revival in group credit life coverage, with Kotak Life's Trivedi expressing optimism about an increase in the number of lives covered.
