RBI sees "contagion risk" in LIC's bank ownership - paper

MUMBAI (Reuters) - State-owned Life Insurance Corporation of India (LIC) could be too exposed to the country's banking sector through its stakes in both state and private lenders, Reserve Bank of India deputy Governor S.S. Mundra said in a newspaper interview.

LIC holds an average stake of 9.21 percent in Indian banks, making it the second-biggest shareholder in the sector after the government, Mundra said in rare public comments on the insurance and investment group.

The cross-holdings of India's state-owned firms have long been an area of concern but are not often discussed in public by major regulators like the RBI, which oversees banks.

"There is a contagion risk or interconnected risk. Suppose the banking sector is not doing well and is in trouble, the equity holding of LIC will see a value erosion. This (affects) the capability of the insurer to serve their policyholders," Mundra was quoted as saying in an interview with Business Standard.

Mundra said there was also a related risk if LIC chose to sell its shares, unsettling markets.

"In any case, if too much of bank shares are held by one entity, the habit and capability of banks in tapping the market gets impacted," Mundra said.

LIC did not immediately respond to a request for comment.

LIC, with some $420 billion in assets under management, was formed more than five decades ago when the private insurance sector was nationalised following India's independence from Britain.

Some 250 million Indians are covered by LIC policies.

In recent years, LIC has been a key buyer of shares in government-owned enterprises sold off by New Delhi, often bailing out less-than-successful issues of new stock.

(Reporting by Swati Bhat; Editing by Clara Ferreira Marques and Ryan Woo)