CRISIL expects Rs 6,000 crore of municipal bonds to be issued over the next three fiscals from progressive and proactive urban local bodies (ULBs), riding on policy and regulatory facilitations.
While the amount may seem small in the context of India’s massive infrastructure needs, it is nearly 4 times what was raised - Rs 1,550 crore - in the past 20 years. There were no issuances between fiscals 2011 and 2017.
Globally, the US has the largest municipal bond market with $3.8 trillion in outstanding issuances (or 10% of its overall debt capital market), and a broad investor base.
The government’s move to develop civic infrastructure across the country through the AMRUT1 and SMART City missions requires significant capital spending by ULBs. These will have to be funded by market borrowings in addition to government grants.
CRISIL estimates ULBs will have to borrow ~Rs 15,000 crore to fund these projects through fiscal 2023. Given the large requirement, the government and the Securities and Exchange Board of India (SEBI) have been working to improve ULBs’ access to the capital market.
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.
Several ULBs have initiated their bond issuance process by appointing transaction advisors. And in June this year, the Pune Municipal Corporation raised Rs 200 crore by issuing 10-year bonds.
“More such issuances are in the offing,” said Subodh Rai, Senior Director, CRISIL Ratings. “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.”
CRISIL pioneered the methodology for rating ULBs and also rated India’s first standalone tax-free bond by the Ahmedabad Municipal Corporation in 1998. Today, CRISIL has outstanding ratings on 27 ULBs of which 4 are in the ‘High Safety’ category, and 10 in the ‘Moderate to Adequate Safety’ category. This is in addition to credit assessments of over 100 ULBs undertaken as part of AMRUT over the past 18 months.
While issuances so far have largely been by ULBs with ‘High Safety’ category ratings, of the Rs 6,000 crore bonds expected, 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.”
CRISIL expects a gradual increase in investor interest in municipal bonds over the medium term. The implementation of SEBI guidelines will improve transparency and can go a long way in helping ULBs access the capital markets.