Closure of unviable branches and trimming flab, backed by a supportive legal framework, will help develop a sound banking system and keep weak banks afloat, Verma said.

The former State Bank of India chairman was speaking at the Bank Economists' Conference '98. The three-day conference focuses on the theme: `Towards a sound and strong banking system'. Verma made a presentation on `Foundations of sound banking systems'.

On the external front, Verma said the operating environment, which includes the policy and institutional framework, a supportive political system and legal system, are some of the factors that have an immediate bearing on the bankingsystem.

Outlining the factors contributing to a sound banking system, he said transparency of operations, a good management information system, human resource development policy and a sound legal system conducive to controlling non-performing assets were among the few internal factors.

According to him, transparency is the foremost requirement and pre-condition for controlling the other factors. The transparency standards must keep changing as the banking system progresses and changes over the years.

"Transparency standards have to be dynamic and the quest for transparency has be continuous," he said adding that socio economic factors sometimes force the regulators to go easy on transparency.

Commenting on the management information system (MIS) being practised by most public sector banks, Verma said it is not focused or action-oriented and there was need to revamp and create uniformity in the system across banks. "The kind of MIS system the public sector banks is such that it has all data but noinformation. Better MIS is a must as this will lead to prevention of attrition and bad loans apart from detecting frauds," Verma said.

Emphasising the importance of upgrading the skill levels among the bank employees, he said that transparency in banking operations depended largely on the skill level operable and its upgradation over the years. "Lack of skills have led to huge disasters as can be seen in the Barings crash," he said.

On the issue of non-performing assets (NPAs), Verma said the accumulation in NPA level is on account of a slow and unsupportive legal system which needs to be changed to ease the pressure on banks. "There is a need for phased tightening of norms and the there needs to be a clinical and surgical approach to historic NPA which have accumulated over the years," he said.

A better selection in asset portfolio can be affected by credit assessment and risk management exercises. Poor quality of assets coupled with stringent asset classification norms have hurt banks in the past.