Borrowings by municipal corporations from financial institutions have risen by 363% over the past five years, according to a report released by the Reserve Bank of India on Wednesday. The ‘Report on Municipal Finances’ noted that borrowings by such corporations from financial institutions increased to Rs 13,364 crore in 2023-24 from Rs 2,886 crore in 2019-20.
The municipal bond market in the country remains in a nascent stage. As of March 2024, the total municipal bonds outstanding at Rs 4,204 crore was just 0.09% of the total corporate bonds outstanding. Most municipal bonds are privately placed with select investors, limiting the investor base.
“An improvement in the financial performance and credit ratings of the municipal corporations is critical for promoting investor confidence and broadening market participation,” said the report.
Municipal corporations need to enhance their sources of revenue through reforms in property tax, rationalisation of user charges, and better collection mechanisms, it added.
The elasticity of property tax revenues, the predominant source of tax revenue, can be improved by adopting property tax formulae which are more reflective of property valuation.
“State-specific strategies to strengthen municipal corporation finances through local taxation reforms, better enforcement, augmenting institutional capacity and transparent financial management are crucial for resilient municipal finances and effective urban development,” said the report.
Compared to advanced economies and other comparable emerging market economies, Indian municipal corporations generate much lower revenues and consequently, spend fewer resources as a percentage of GDP, it added.
Borrowings from financial institutions accounted for 5.2% of total municipal receipts in 2023-24 as compared with 1.9% in 2019-20. The municipal corporations in Odisha and Telangana had higher shares at 14.4% and 15.1%, respectively, in these two years.
Municipal borrowings remain negligible at less than 0.05% of GDP for all the municipal corporations. The highest level of per capita borrowings from financial institutions was observed in Odisha (Rs 1,258) in 2022-23.
Bond activity dipped during 2020-22 due to the pandemic but has seen some recovery during 2023 and 2024. Municipal bonds worth Rs 4,204 crore were outstanding as on March 31, 2024 (0.01% of GDP) as compared to Rs 1,100 crore as on March 31, 2005 (0.03% of GDP).
The coupon rates on municipal bonds have generally moved in tandem with those on central government bonds in recent years. Municipal bonds delivered an average return of 8.5% during 2023-24, as compared with 8.3% and 7.3% on the NIFTY Medium Duration G-Sec Index and NIFTY AAA Medium Duration Corporate Bond Index, respectively.