New Delhi [India], March 19 : Municipal bond issuances in India are expected to raise more than Rs 1,500 crore in the Financial Year (FY) 2025-FY2026, primarily driven by the Government's push, according to a report by ICRA.
The report added that the share of Green/pooled bonds is also likely to increase, led by a growing focus on Environmental, Social, and Governance (ESG) initiatives and enhancement in the credit profile of Urban Local Bodies (ULBs).
The municipal bond market in India has gained significant traction in recent years, especially since FY2018, largely due to fiscal incentives introduced by the Government of India (GoI).
Since FY2018, the total amount raised in municipal bonds has exceeded Rs 2,600 crore, a substantial increase compared to the period between FY1998-FY2005 when less than Rs 1,000 crore was raised.
The growth in the Indian municipal bond market can largely be attributed to measures taken by the Government and regulators.
In 2015, the Securities and Exchange Board of India (SEBI) issued the "Issue and Listing of Debt Securities by Municipalities" Regulations, which defined the status of municipal bonds and garnered investor interest.
Furthermore, in FY2018, the GoI initiated an incentive scheme, offering approximately Rs 13 crore for every Rs 100-crore bond issuance, providing a strong impetus for Urban Local Bodies (ULBs) to use this financing mode.
The report added that despite the positive growth, there are several key challenges that continue to affect the municipal bond market.
These include ULBs' high dependence on government grants, lack of adequate and timely financial disclosures, illiquidity, the absence of a secondary market for bonds, high compliance requirements, and relatively weak credit quality of ULBs in accessing capital markets.
All municipal bond issuances since FY2018 have been supported by strong structured payment mechanisms.
These mechanisms have been instrumental in enhancing the credit ratings of the bonds, with all issuances receiving an AA rating, despite the diverse credit profiles of the underlying issuer ULBs.
Moving forward, most of the upcoming issuances are expected to follow similar structures and terms, the report added.
Since FY2018, approximately 17 municipal bonds worth about Rs 2,600 crore have been issued, with an average size of Rs 150 crore, as per the report.
ICRA also highlights that persistent challenges, such as improving the ULBs' own credit quality and addressing the lack of adequate disclosure and information systems, will remain crucial for the continued growth of a healthy municipal bond market in India.
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