Issuance of municipal bonds is expected to gather steam over the next three financial years with about Rs 6,000 crore expected to be raised through municipal bonds by proactive urban local bodies (ULBs) across India. According to credit rating agency Crisil, while the amount may seem small in the context of India’s massive infrastructure needs, it is nearly four times of what was raised — Rs 1,550 crore — in the past 20 years. There were no issuances between fiscals 2011 and 2017, it said. Globally, the US has the largest municipal bond market with $3.8 trillion in outstanding issuances (or 10% of its overall debt capital market), and a broad investor base. Crisil estimates ULBs will have to borrow around Rs 15,000 crore to fund AMRUT1 and SMART City missions which will require significant capital spending by ULBs through financial year 2022-2023.
In June 2017, Sebi notified guidelines on disclosure of financial information by ULBs at regular intervals, audit of accounts to increase transparency, and to improve the prospects for municipal bond issuances. On its part, the government has also announced an interest subsidy scheme to make issuances competitive. Several ULBs have initiated their bond issuance process by appointing transaction advisors. In June, the Pune Municipal Corporation raised Rs 200 crore by issuing 10-year bonds. Subodh Rai, senior director, Crisil Ratings, believes more such issuances are in the offing because bonds offer ULBs structuring flexibility through longer tenures, annual interest payments, and fixed coupon rates compared with bank loans.
According to Anuj Sethi, senior director, Crisil Ratings, issuances so far have largely been by ULBs with ‘High Safety’ category ratings. However, of the Rs 6,000 crore bonds expected, many will be from civic bodies with varying levels of creditworthiness. “Lower-rated ULBs can also raise money through bonds using credit enhancement structures such as escrow of receivables, interception of grants, partial guarantee, and pooled finance, and thus reduce their borrowing costs,” he said.