India should have 5-7 big banks, both public and private: CEA

New Delhi, Oct 25 (IANS) India should ideally have 5 to 7 large banks, Chief Economic Adviser (CEA) Arvind Subramanian said on Wednesday pitching for consolidation in the banking sector.

"The big question also going forward is should there be more majority private sector ownership in the banking system? What is a good banking structure for India 5-10 years from now," Subramanian said during a lecture at the SGTB Khalsa College here.

"Basically India needs about five, six, seven reasonably big banks both in public and private sector, and to be able to compete domestically and be competitive internationally," he said.

The CEA cited the example of China, saying that country has four large banks, which are currently among the biggest in the world.

Referring to the recapitalisation of state-run banks announced on Tuesday, Subramanian said it must be selective and incentive-based, directing capital to those banks which have the maximum potential for new credit creation.

"Since all banks must maintain a minimum capital adequacy, one possibility would be to recapitalise the unviable banks only to the extent necessary to finance their current balance sheet size while explicitly not providing for their growth," he said.

In a stimulus package aimed to boost flagging economic growth, create jobs and increase credit flow, the Union Cabinet on Tuesday approved a Rs 2.11 lakh crore recapitalisation plan for state-run banks and massive road infrastructure investment of nearly Rs 7 lakh crore over five years.

Of the support to banks, Rs 1.35 lakh crore will be raised through recapitalisation bonds and the remaining sum through budgetary support and market borrowings.

Regarding the Goods and Services Tax (GST), Subramanian said there is an emerging consensus in favour of having low rates, fewer tax slabs and putting as many products in and leaving out a limited number of products.

"Finance Minister said that we need to move towards rationalising it and I am very encouraged that over the last month or so, and going forward, the GST Council will take up this matter and over time reduce the rate," he said.

"Ideally we should have one rate like Singapore does, but even if we get down to two plus luxury goods or demerit goods, I think that would not be a bad outcome at all. I think we will get there sooner rather than later," he added.