Urban local bodies may raise ₹6,000 cr via municipal bonds over next 3 years: Crisil

The dormant municipal bond issuance market is likely to see some activity in the next three financial years with credit rating agency Crisil expecting proactive urban local bodies (ULBs) raising about ₹6,000 crore via this route.

While the amount may seem small in the context of India’s massive infrastructure needs, the agency reasoned that it is nearly four times what was raised — ₹1,550 crore — in the past 20 years. The issuance will be on the back of policy and regulatory facilitation, it added.

“Several ULBs have initiated their bond issuance process by appointing transaction advisors. And, in June this year, the Pune Municipal Corporation raised ₹200 crore by issuing 10-year bonds,” said the agency in a statement.

Pointing out that more such issuances are in the offing, Subodh Rai, Senior Director, Crisil Ratings, said: “That’s because bonds offer ULBs structuring flexibility through longer tenures, annual interest payments, and fixed coupon rates compared with bank loans.”

Further, the capital market also has a large investor base, and can turn out to be more competitive than bank borrowing.

There were no municipal bond issuances between fiscals 2011 and 2017.Globally, the US has the largest municipal bond market with $3.8 trillion in outstanding issuances (or 10 per cent of its overall debt capital market), and a broad investor base.

Crisil observed that the government’s move to develop civic infrastructure across the country through the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and SMART City missions requires significant capital spending by ULBs. These will have to be funded by market borrowings in addition to government grants.

In June 2017, SEBI notified guidelines on disclosure of financial information by ULBs at regular intervals, and audit of accounts to increase transparency, to improve the prospects for municipal bond issuances.

On its part, the government has also announced an interest subsidy scheme to make issuances competitive.

While issuances so far have largely been by ULBs with ‘High Safety’ category ratings, of the ₹6,000 crore bonds expected, Crisil said many will be from civic bodies with varying levels of creditworthiness.

“That shouldn’t be a worry,” said Anuj Sethi, Senior Director, Crisil Ratings. “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.”

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