In a significant shift in the financial landscape, insurance companies have emerged as formidable competitors to banks in the secured personal loan market. The insurance sector has amassed a substantial ₹1.4 lakh crore in loans against policies, matching the total loans provided by commercial banks against fixed deposits.

Insurance Sector's Loan Growth

An analysis of 12 insurance companies reveals a robust growth trend in policy loans:

• All insurers, except Life Insurance Corporation of India (LIC), reported over 25% growth in policy loans.
• LIC maintains the largest share of policy loans at ₹1.27 lakh crore.

Attractive Features of Policy Loans

Insurance companies are offering compelling terms for policy-backed loans:

• Interest rates range between 8.50% to 10.50%.
• Policyholders can borrow 80-85% of their policy's surrender value.
• Loans are available without the need to surrender long-term plans.

Eligible Policies and Loan Process

Policy loans are accessible for various insurance products:

• Endowment plans
• Unit-Linked Insurance Plans (ULIPs)
• Whole-life plans

To be eligible, premiums must be paid for 3-5 years, depending on the policy type.

Comparison with Other Secured Loans

The growth in policy-backed loans stands in stark contrast to other secured loan options:

• Loans against mutual funds grew by only 1% to ₹14,853 crore across 17 listed banks.

Both policy loans and loans against mutual funds offer customers the advantage of pledging existing investments without liquidation. These secured loans also benefit from faster processing times compared to traditional loan products.

Market Implications

This trend indicates a shifting dynamic in the personal loan market:

1. Insurance companies are leveraging their large policyholder base to expand into lending.
2. The growth in policy loans suggests increasing consumer awareness and utilization of insurance policies as financial tools.
3. Banks may face increased competition in the secured loan segment, potentially leading to more competitive rates and terms for consumers.

As the financial services landscape continues to evolve, the rise of insurance companies in the loan market represents a significant development for both consumers and traditional banking institutions. This trend may prompt further innovations and competitive offerings in the personal loan sector.

A contentious debate has erupted between the insurance industry and policymakers over proposed changes to the Goods and Services Tax (GST) structure for health and individual term life insurance policies. While the government's proposal aims to provide relief to policyholders, insurers are raising red flags about potential unintended consequences.

Government's Proposal: GST Relief for Policyholders

The government is considering exempting health and individual term life insurance premiums from the current 18% GST levy. This move is designed to reduce the financial burden on policyholders, making these essential insurance products more affordable and accessible to the general public.

Insurers' Concerns: The Input Tax Credit Dilemma

Despite the apparent benefits for consumers, the insurance sector has voiced significant concerns about the proposed changes. The primary issue revolves around the potential loss of Input Tax Credit (ITC) if a full GST exemption is implemented.

Currently, insurers can claim ITC to offset taxes paid on various operational aspects, including:

• Commissions
• Reinsurance
• Technology
• Distribution
• Administration

If the GST exemption is applied without addressing the ITC issue, insurers warn that it could lead to an increase in their operational costs by 7-10%.

The Inverted Duty Structure Challenge

The continuation of the inverted duty structure is at the heart of the insurers' concerns. This structure could potentially negate the benefits of the GST exemption, as it would increase costs for insurance companies while simultaneously reducing costs for policyholders.

Industry Appeal and Government Response

In response to these concerns, the General Insurance Council has written to the Finance Ministry. Their request is clear: implement a complete GST exemption on health insurance to address the potential negative impacts on the industry.

However, sources close to the matter indicate that the Finance Ministry is unlikely to eliminate the inverted duty structure on health insurance. This stance suggests that the government is prioritizing consumer benefits over industry concerns in this particular policy decision.

Implications for the Insurance Sector and Consumers

The proposed GST changes present a complex scenario with potential winners and losers:

• Policyholders: Stand to benefit from reduced premium costs if the GST exemption is implemented.
• Insurers: Face the prospect of increased operational costs due to the loss of Input Tax Credit.
• Insurance Industry: May need to adapt to new financial realities, potentially affecting product pricing and offerings in the long term.

As the debate continues, stakeholders from both the insurance industry and government will need to work towards a solution that balances consumer affordability with the financial sustainability of the insurance sector. The outcome of this dispute could have far-reaching implications for the future of health and term life insurance in India.