As Indian cities expand, the need for affordable housing, efficient transport and basic amenities has also grown. In order to meet these demands, the functioning of urban local bodies (ULBs) including municipal corporations, municipal councils and nagar panchayats needs to be overhauled and adequate funding sources provided to them.
What is a ‘Municipal Bond’?
A municipal bond is a bond issued by a local government, or their agencies to finance the local fund requirements.
History of Municipal Bond market in India –
In India, the Bangalore Municipal Corporation was the first municipal corporation to issue a municipal bond of Rs 125 crores with a State guarantee in 1997. However, the access to capital market commenced in January 1998, when the Ahmedabad Municipal Corporation (AMC) issued the first municipal bonds in the country without State government guarantee for financing infrastructure projects in the city. AMC raised Rs 100 crores through its public issue.
Need for Municipal bonds –
Indian urban areas can no longer rely solely on public capital flows. Increased private sector engagement via public private partnerships, should be a paramount goal. This requires a more active and coordinated leadership in project management, technical guidance and risk mitigation across different levels of the government.
RBI’s recent report on municipal finances –
- The Reserve Bank of India’s recent Report on Municipal Finances has recommended increasing the scale of municipal bond issuances and allowing secondary market trading in them, to provide a viable funding channel to these institutions.
- While the RBI is right in suggesting alternative sources of finance for the ULBs, which are primarily dependent on loans from banks, States and the Centre to bridge the deficit in their budgets, it is moot if the market is ready for municipal bonds, given the weak finances and doubtful repayment capacities of most of these urban bodies.
- Municipal bond issuances began in 1997 but less than ₹6,000 crore has been raised since then, by just a handful of municipalities. This is miniscule when compared with the over ₹44 lakh crore of State development loans outstanding.
- The reason is the rather small balance sheets of these entities, which crimps their borrowing as well as repayment capacities. Though many of the cities contribute substantially to the State GSDP, the revenue shared with them by the State falls woefully short.
- Property tax, which is the dominant source of own tax revenue, is much lower than it should be due to malpractices in the property market. Other levies have not been adequately tapped by these entities.
- Most ULBs will find it difficult to meet SEBI’s criteria of reporting surplus income in any of the three preceding financial years before the issue and not reporting negative networth in the three preceding years. While credit rating has been made mandatory, the RBI points out that of the 94 cities which were rated in 2018, only 59 per cent were rated investment grade or above.
- The yields of the municipal bond issuances are no doubt attractive compared with bank deposits and central government bonds, but the higher risk and tiny size of issuances are deterrents to investors.
What could be done then?
- Building sustainable revenue streams will be a better idea than going the municipal bond way for these ULBs.
- A standardised formula needs to be adopted in all States for devolution of tax proceeds equitably with urban local bodies in line with the area under their jurisdiction, population and their developmental needs.
- Suggestion by experts that the Centre and States should share a specific part, around one-fifth of the GST revenue, with urban and rural local bodies can also be considered.
- Standard accounting methods should be enforced across ULBs which should be displayed without much lag on their websites. With such steps, ULBs can approach the bond market with larger issuances.
Source – The Hindu Business Line
QUESTION – What is a ‘municipal bond’? Discuss its significance and the ways to strengthen it as a viable financial instrument.