With low appetite for debt and volatility in equities, banks are targeting to buy municipal bonds. ICICI Bank and State Bank of India (SBI), which have municipal bonds in their portfolio, are planning to make more such investments considered safe and high-return. Akash Deep Jyoti, head of corporate & government ratings at Crisil said, ?The municipal bond market in India could cross Rs 5,000 crore in three to five years. Investments in these bonds will fund urban infrastructure across the country. Unlike companies, municipal bodies are almost bankruptcy-proof as their revenue flows and taxes are insulated from inflation and economic upheavals. Indian banks are likely to earn 13-16% on municipal bonds in the longer run.?
An official of ICICI Bank, who did to want to be identified, said, ?We have adopted a low-risk, low-return investment model. We will actively participate in the fund raising of urban local bodies.? The official said the bank had not yet budgeted a specific pool, but the corpus will be phenomenal.
ICICI Bank will soon either subscribe to municipal bonds or buy equity stakes in public-private partnership projects backed by municipal bodies, said the official. A substantial investment in the bonds issued by the Brihanmumbai Municipal Corporation or an equity participation in a Mumbai city sewage or water project is an immediate possibility, the official added.
?We are looking at least 9% return on such investments that the bank is expected to make within three months across the country. Before taking an investment decision, we?ll asses a variety of parameters like credit ratings assigned to the municipal body, repayment assurance, and the possibility of generating utility charges income on regular basis etc,? he said.
He also said pension funds operating in India would pose a stiff competition to banks in the municipal bond market. As reported by FE earlier, municipal bodies have issued bonds worth Rs 1,200 crore in the past 10-12 years. Tarun Bhatia, head of financial sector ratings, at Crisil, said the ranking of municipal bodies across the country is expected to open new investment vistas for Indian banks on non-SLR side as many municipalities in India are expected to offer debenture and commercial papers for funding capital expenditure.