PremiumThe Reserve Bank of India (RBI) has suggested issuing municipal bonds as the demand for infrastructure grows in the cities to meet their funding requirements.
According to a report by RBI on municipal finances, the challenge for civic bodies is to ease the resource crunch. India's local bodies are financially weak as they don’t have enough autonomy to levy taxes, grant exemptions, or even borrow funds, making them dependent on bank loans or central or state government resources.
"A vibrant sub-sovereign debt market catering to a robust investor appetite for municipal bonds can provide an avenue for these entities to access public funds," the report mentioned.
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 said.
It said a vibrant sub-sovereign municipal debt market catering to a robust investor appetite for municipal bonds can provide an avenue for these entities to access public funds, create an alternative class of assets for investors and further deepen India's domestic debt market.
The central bank suggested levying a tax on residents to pay bondholders, back the notes by earnings from a particular project or use a hybrid mechanism where revenues are used to service the debt. It also suggested pooled financing, where a common bond is issued by several municipal bodies to keep costs in check.
Some pick up in municipal bond issuance was seen a few years ago as Prime Minister Narendra Modi implemented various government programs aimed at building smart cities to upgrade water, sewer, and drainage infrastructure. But it petered out gradually as there are challenges around transparency and governance of local bodies.
Credit rating too can play a vital role in attracting new investors by providing an independent and credible assessment of the risk and prompt municipal bodies to undergo reforms, the RBI said.