The Reserve Bank of India (RBI) has expressed reservations over Life Insurance Corporation of India’s (LIC) over exposure to banking sector.
On an average, LIC holds 9.21 % stake in banks including private sector banks. This makes LIC second largest lender in banks after the government.
RBI said that there is a contagion or interconnected risk. For instance, suppose if the banking sector is not doing well and is in trouble, the equity holding of LIC will see value erosion. This affects the capability of the insurer to serve their policyholders.
The other interconnected issue is if LIC wants to sale a big chunk of bank’s shares then it will create a contagion in the markets.
And also, if too much of bank shares are held by one entity, the habit and capability of banks in tapping the market gets impacted. This has an implication for financial stability.
vinay mohanty
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