The government is set to allow banks to become members of stock exchanges for selling government securities.

The high-level co-ordination committee on capital markets, headed by Reserve Bank of India Governor Bimal Jalan, has recommended that banks sell gilts directly to the public, who otherwise have to depend on brokers.

The move is expected to step up the demand for government paper. The public is yet to respond to the gradual relaxation of trading norms in the secondary market.

In the primary market, the RBI sells 5 per cent of government securities on a non-competitive basis to encourage small investors to buy gilts for a minimum bid size of Rs 10,000.

However, demand has been weak because of the lack of trading activity in such paper in the secondary market.

Despite the Centre allowing screen-based trading in government securities instead of the telephone-based order matching system, the volumes have not gone up.

Government officials said the high-level committee, comprising representatives from the finance ministry, the RBI and the Securities and Exchange Board of India, wanted to provide individual investors with an alternative to investment in the equities market.

In 2003-04, the Centre expects to sell gilts worth about Rs 1,07,194 crore (Rs 1071.94 billion), including 364-day treasury bills, with the state governments expected to chip in with nearly Rs 40,000 crore (Rs 400 billion).

However, analysts said with the yield on gilts being substantially lower than that of small savings instruments, it would be difficult to convince people about this route unless the Centre offered tax incentives.