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Civic bodies need easier access to bond market, says RBI study

Civic bodies need easier access to bond market, says RBI study
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First Published: Thu, Jan 17 2008. 12 17 AM IST

Need funds: Over the next seven years, urban local bodies need to contribute Rs45,000 crore for infrastructure development. The sum, says Crisil, is in far access of what these bodies can generate thr
Need funds: Over the next seven years, urban local bodies need to contribute Rs45,000 crore for infrastructure development. The sum, says Crisil, is in far access of what these bodies can generate thr
Updated: Thu, Jan 17 2008. 12 17 AM IST
Mumbai: There’s scope to develop a municipal bond or munibond market in India because municipalities and corporations that govern urban local areas in the country do not generate enough money from taxes and utility payments to fund their expenditure. These are the finding of a study conducted by a research group at the Reserve Bank of India, or RBI, on urban local bodies.
Need funds: Over the next seven years, urban local bodies need to contribute Rs45,000 crore for infrastructure development. The sum, says Crisil, is in far access of what these bodies can generate through operations.
The study, carried out by the Development Research Group, a wing of RBI’s department of economic analysis and policy, also suggested that borrowing restrictions on these bodies be eased. It added that apart from munibonds, specialized municipal funds and public-private partnerships could be looked at as ways to finance the creation or maintenance of urban infrastructure.
Most municipal Acts in India impose restrictions on the power of municipalities to borrow funds. The state government concerned needs to approve any efforts by the civic bodies to raise debt.
Municipalities usually borrow on the strength of the taxes, duties and fees they expect to earn. However, state governments prescribe other conditions regarding rate of interest, repayment of principal, the interest rate on bonds, date of floatation, even the schedule for loan repayment.
They also specify the purposes for which a municipality can access the market: they are typically allowed to raise money for construction of permanent ‘works’, acquisition of land and buildings, and repayment of government and other debts.
Recently, an international conference, held in the city, on developing India’s municipal bond market emphasized the need for encouraging investors to consider municipal bonds as an attractive alternative to other financial instruments.
M. Damodaran, chairman of India’s capital market regulator, said at the conference that the Securities and Exchange Board of India would work towards strengthening the municipal bond market in India.
The RBI study, which covered 35 metropolitan municipal corporations, has criticized elaborate state government controls on municipal authorities that crimp latter’s ability to levy taxes and user charges or to borrow funds. The study also suggested that municipal bodies work towards improving their budgeting and accounting systems and the quality of disclosure of information to the public.
“There is no source of reliable data on finances of all local bodies in India to estimate their resource gaps. There is also a lack of uniformity in classification and reporting of financial data, which do not allow precise comparison on various parameters,” the study said.
India needs more than Rs1.2 trillion of investment in urban infrastructure over the next seven years and urban local bodies need to contribute Rs45,000 crore for infrastructure development.
According to rating agency Crisil Ltd, the sum is far in excess of what these bodies can generate through operations. It said urban bodies will need to borrow Rs30,000 crore to finance their contribution towards this, and the borrowing will need to be for a minimum tenure of 10 years, in line with the payback on the projects.
The municipal bond market in India is a minuscule 0.1% of the total corporate bond market. In the last six years, municipalities in India have tapped the bond market only 13 times, raising a total of Rs733 crore.
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First Published: Thu, Jan 17 2008. 12 17 AM IST