The regulator in the Indian insurance industry, i. e. the Insurance Regulatory Authority of India (IRDA) has recently said that it will be placing a ban on covers following reckless sale of the product by a handful of non-life companies.

It is to be mentioned here that credit insurance is similar to a guarantee and the insurance company promises to pay the lender even in a scenario where the borrower defaults to make payment. Lender is a person that will be buying the cover recovers in such a case from the insurance premium from the borrower.

However, it is to be mentioned here that the move is not expected to increase the total credit risk of the banks because of the fact that only a very small number of loans carry credit risk protection on their backs. According to a circular issued by the IRDA, it has come to this conclusion after examining the credit default insurers who are underwriting the risks and do not have a proper framework to work under.

Moreover, the circular also said that the general insurance cos. should stop selling such policies till IRDA comes up with specific guidelines on the same.