Mumbai: The Reserve Bank of India today released a report on municipal financing, suggesting the need for these corporations to explore alternative sources of funding such as bond issuances.
According to the report, only a few prominent municipal corporations tap the bond market as a source of finance, leading to negligible municipal bonds.
The initial cost of bonds is sharply high for over 200 municipal corporations and many smaller urban local bodies, giving them limited access to the debt market, while the lack of a secondary market for municipal bonds has also been a constraint in attracting investor base, the RBI report said.
The experience of the past two decades showed that only large urban local bodies, with good technical competencies can meet the necessary requirements of bond issues, it said.
The central bank believes that access to the debt market for smaller urban local bodies can be enhanced through pooled financing, under which a common bond is issued by pooling the resources of several local bodies.
Pooled financing essentially involves creation of a state pooled finance entity, which can be registered either as a trust or as a special purpose vehicle. The state pooled finance entity issues bonds and debt servicing is financed through the pooled revenue stream of the participating municipal bodies.
Pooled financing will reduce the cost of issuing bonds for individual local bodies and enhance the creditworthiness of their papers as the risk gets hedged over by all participating bodies, it said. This mechanism has precedence in India, with Andhra Pradesh, Maharashtra, Karnataka and Tamil Nadu issued bonds serviced from the pooled revenues of multiple corporations.
Further, renewed support from the Union government through schemes–Atal Mission for Rejuvenation and Urban Transformation–has also led to fresh supply of municipal bonds.
“Recent instances of bond issuances have demonstrated that bond financing can be a viable alternative for raising resources for municipal corporations,” RBI said in its report.
Additionally, provisions relating to listings of these debt securities, involvement of major rating agencies and push from the central government in the form of reform-linked financial incentives will provide a significant boost to the municipal bond market in India.
“Listing municipal bonds in the stock exchanges can pave the way for developing the much-needed secondary market for municipal bonds in India,” the report added.
Policies to improve the environment for financial investment through sound and efficient regulation, greater transparency, property tax reform and better governance can help nurture a vibrant municipal bond market, it said.
The last municipal body that had tapped the bond market was Uttar Pradesh’s Ghaziabad Municipal Corp in March 2021. The municipal corporation had raised 1.5 bln rupees through green bonds maturing in 10 years that carry a separately transferable redeemable principal parts structure at a semi-annual coupon of 8.10%. The issue was fully subscribed.
With inputs from Agencies