94 cities get rated as urban local bodies prepare for municipal bonds
Credit ratings, ranging from AAA to D, will help determine how urban local bodies raise money and on what terms
New Delhi: In what will help raise resources for India’s urbanization needs, 94 cities across 14 states have received credit ratings from agencies such as Crisil as part of their preparations for issuing municipal bonds.
These ratings, ranging from AAA to D, will help determine how these cities, which are part of the Smart City Mission and Atal Mission for Rejuvenation and Urban Transformation (AMRUT), raise money and on what terms.
The exercise assumes importance given the requirement of around Rs39 trillion (at 2009-10 prices) to build urban infrastructure such as roads and water supply and waste management systems over the next 20 years.
“Credit ratings are assigned based on assets and liabilities of Urban Local Bodies (ULBs), revenue streams, resources available for capital investments, Double Entry Accounting practice and other governance practices,” according to a 26 March urban development ministry statement.
Interestingly, while 55 of these cities got “investment grade” ratings, 39 received credit ratings below the investment grade (BBB-).
The need for this exercise can be gauged from the meagre amount of around Rs1,500 crore raised by 25 ULBs over the past 20 years by floating municipal bonds. Ahmedabad Municipal Corporation was the first to do so in 1998.
“Ministry of urban development is promoting credit rating of cities as one of the five transformational reforms under which about 500 cities and towns that account for about 65% of total urban population were to be given credit ratings during this year,” the statement added.
The exercise is imperative, with pressure mounting on India’s urban sprawls. According to the 2011 census, 377 million Indians, accounting for 31.1% of the country’s population, were living in urban areas. This number has been rapidly increasing with the United Nations Habitat World City’s 2016 report estimating urban populace to have reached 420 million in 2015.
Experts believe that the exercise will have a transformational impact on the urban local bodies, by helping them access the debt market.
“ULBs have been largely doing tax free issuances to keep cost of borrowing low. This time the GoI (Government of India) has not extended tax concession However, benign interest rate regime will help in keeping the cost of borrowing low for ULBs rated in high safety categories. Low cost of borrowing will be an advantage for the ULBs, whose projects typically have low viability, long gestation period and low to moderate cost recovery,” said Subodh Rai, senior director, Crisil Ratings.
Typically, such municipal bonds have a five to seven years tenure, given the tepid investor appetite for them. India’s 10-year government securities (G-secs) yield, which is the popular measure for interest rates in the government securities market was 6.94% on 9 May. As on 31 March, the total outstanding government securities (both Central government as well as state development loans) were around Rs68.5 trillion.
In its Three-year Action Agenda document released last month, NITI Aayog also pitched for ULBs raising finances by issuing municipal bonds.
“Well run ULBs should have the power to raise financial resources including through municipal bounds. Introduction of standardised, time-bound, audited balance sheets across 4,041 ULBs would improve financial management as well as spur further reforms in this area,” the document said.
Also, the Economic Survey 2016-17 made a strong case for giving more financial independence to urban local bodies such as municipal corporations so that these units within states compete among themselves and deliver better services in the backdrop of rapid urbanization.