however, on a request to review this approach, an informal group was set up in rbi and the report has been circulated as a discussion paper on the rbi website. after studying the international experience, the group recommended that banks may classify their entire investments into three categories, viz., held for trading, available for sale and permanent. the permanent category should not exceed 25 % of total investment. the group recommended that securities classified as held for trading should be marked to market monthly, if not more frequently. securities in available for sale was recommended for marking to market at the year end or at more frequent intervals as decided by the board of directors. securities held in permanent category can be carried at cost or market value whichever is lower. if you do find it worthwhile to vent your views, perhaps in consultation with bankers present here, please do so and come back to us soon. active consolidation of government debt as mentioned earlier, we made a beginning during the current year with regard to consolidation of government debt. consolidation has improved the liquidity in the market with consequent reduction in the liquidity premium. encouraged by the results, we would now like to embark on an active programme of consolidation consistent with the market borrowing programme of government. currently, there are about 98 outstanding loans with residual maturity of up to ten years, covering 78 % of outstanding value. there are 20 loans with maturity over 10 years covering the remaining 22 %. over the last few years, the investor profile in these loans has changed, partly reflecting the valuation norms introduced by the rbi. a number of banks have resorted to substitution of old loans for new marketable loans. keeping all these developments in view, some options can be explored. wherever there are a large number of fragmented issues in any year, these could be consolidated through recall of some loans against reissue of others. another option is to convert loans maturing, say in the next few years into certain actively traded securities coinciding with the same maturity or with elongated maturity. even if this does not result in reduction in the number of outstanding loans, the objective of improved liquidity in a few benchmark securities will be achieved. pds may like to examine these issues in greater detail. operationalising liquidity adjustment facility the committee on banking sector reforms ( narasimham committee ii ) had suggested that the rbi ’ s support to market should be through a liquidity adjustment facility ( laf ). under this facility, the management of liquidity by the rbi will have

. however, financial markets are becoming conscious of the levels of fiscal management of different states. further, under the current system, there is no scope for better managed states to access funds at competitive rates of interest. third, an option was given to the state governments to enter the market through a flexible approach on their own to the extent of 5 to 35 % of their gross borrowings. some states have already exercised this option. the ultimate aim is to make all the states raise the entire market borrowings in a flexible manner. some state governments have indicated that they would like pds to play a larger role and pds may also find substantive business opportunities in this process. i would urge pds to discuss this subject in today ’ s meeting. it may be of interest to note that in the deliberations with state finance secretaries, two options on the role of pds were flagged, viz., underwriting of state loans by pds and issuing loans through bookbuilding exercises undertaken by pds. separation of monetary management from debt management recently, there has been renewed articulation of a view that government debt management be separated from monetary management by rbi. let me share with you our position. an informal working group was set up within rbi to examine the issue internally. the group was of the view that the rbi needed to exit its role as a debt manager in the interest of price stability and favoured separation of debt management from monetary management. the group suggested taking out all issuance and debt management related activities from the rbi and assigning them to a separate institution to be set up for this purpose. the rbi would then retain only core activities related to monetary policy operations such as undertaking open market operations including repos, carrying out bank ’ s own investment activities, undertaking market making functions and regulating the government securities market. the recommendations were examined within the rbi. there seems to be little evidence that in the current stage of market development, and given the large market borrowing programme of government, separation of the two functions would result in a more advantageous situation than is the case now. while it can be argued that separation of the two functions may put pressure on the government to reduce its borrowing requirements, on balance it may be better to coordinate the two functions for the present, while vigorously pursuing with government a reduction in government borrowings to more sustainable levels and developing the government securities market further. it has been concluded by us that while status quo could continue, the issue will have to be reviewed from time