Context: Municipal bond issuances in India are expected to raise more than ?1,500 crore in the Financial Year (FY) 2025-FY2026, primarily driven by the Government’s push, according to a report by ICRA.

Background: –

• The municipal bond market in India has gained significant traction in recent years, especially since FY2018. 
• Approximately 17 municipal bonds worth ?2,600 crore have been issued since FY2018, with an average bond size of ?150 crore.

Key takeaways

• Municipal bonds are debt instruments issued by Urban Local Bodies (ULBs) to raise funds for urban infrastructure development.

Growth of the Municipal Bond Market in India

• Since FY2018, the total amount raised through municipal bonds has exceeded ?2,600 crore, a significant rise compared to less than ?1,000 crore raised between FY1998-FY2005.
• Government Initiatives:
  • In 2015, SEBI introduced the “Issue and Listing of Debt Securities by Municipalities” Regulations, defining the status of municipal bonds and increasing investor interest.
  • In FY2018, the Government of India (GoI) launched an incentive scheme, offering ?13 crore per ?100 crore bond issuance, encouraging ULBs to adopt this financing mechanism.
• Credit Ratings & Payment Security:
  • All municipal bonds issued since FY2018 have had strong structured payment mechanisms, helping them secure an AA rating, despite varying credit profiles of ULBs.
  • The structured mechanisms have ensured timely repayment and enhanced investor confidence.

Challenges in the Municipal Bond Market

• High Dependence on Government Grants: ULBs still rely heavily on state and central grants.
• Lack of Financial Transparency: ULBs struggle with timely financial disclosures and proper documentation, affecting investor confidence.
• Liquidity & Secondary Market Absence: Municipal bonds lack a secondary market, limiting their tradability and attractiveness to investors.
• Regulatory Compliance: The high compliance burden makes it difficult for smaller ULBs to issue bonds.
• Weak Credit Quality: Many ULBs lack robust financial management, making them less creditworthy in capital markets.

Source: Livemint