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.

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.


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