Non-lending financial service companies are better placed than banks in a rate cut scenario: Report
T
he non-lending financial service companies are better equipped to manage the impacts of rate cuts compared to traditional lending businesses, highlighted a report by Deven Choksey Research.
The report noted that the non-lending financial services like life insurance companies have demonstrated a stronger ability to adapt to changes in interest rates. This is largely due to their stable revenue models, flexible product offerings, and lower sensitivity to fluctuations in interest rates.
"We believe the non-lending financial services, such as life insurance companies, are in a better position than traditional lending businesses when interest rates are cut" said the report.
The report added that one of the key reasons life insurance companies fare better in a low-interest-rate environment, is their long-term focus. Life insurance policies, which often have fixed premiums, provide these companies with a degree of protection against immediate economic changes.
It said, "insurers are often shielded from the immediate impacts of rate cuts due to the long-term nature of life insurance policies with fixed premiums".
Unlike banks, which are heavily impacted by the Reserve Bank of India's (RBI) repo rate cuts due to their reliance on repo-linked loans, life insurers can continue to manage their liabilities effectively while benefiting from investment income on their reserves.
It also added that life insurers enjoy greater investment flexibility. They typically invest in a diverse range of assets, including equities and alternative investments, which often yield higher returns in a low-interest-rate setting. This contrasts with banks, whose portfolios are more heavily focused on fixed-income assets, putting them at a disadvantage when rates fall, leading to compressed profit margins.
"This flexibility enables them to pursue higher returns compared to the fixed-income focus of many banks during rate cuts. These advantages allow life insurers to navigate economic fluctuations more effectively than banks, which face margin pressures and competitive challenges" said the report.
In addition to these financial benefits, life insurance companies are adapting to shifting consumer preferences and expanding their distribution networks. The Indian life insurance sector is seeing growing demand for non-participating, annuities, and protection products, as customers increasingly seek guaranteed returns and financial security in an unpredictable economic environment.
This shift in the insurance market highlights the strategic advantage that life insurers have over traditional banks, particularly when interest rates are cut. As these companies continue to innovate and tap into India's vast, underpenetrated insurance market, their ability to navigate economic challenges strengthens further, providing a stable alternative to banks in times of financial uncertainty.
✔️ Non-lending financial service companies are better placed than banks in a rate cut scenario: Report
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