All You Need To Know About Investing In Municipal Bonds 

In times when city development is on a new high, the municipal corporation cannot rely solely on its revenue sources, including tax and non-tax and government aid to fulfil the need. Some of these corporations are now finding new ways of public participation to raise funds and use them for developing city infrastructure. One of the new avenues of raising funds is municipal bonds.

Municipal bonds is a popular form of raising funds in the West. According to a report released in November last year by rating agency Crisil, globally, the US has the largest municipal bond market with $3.8 trillion in outstanding issuances (or 10 per cent of its overall debt capital market) , and a broad investor base.

So, what are municipal bonds and how can they play a crucial role in the development of cities.

The rise of municipal bonds

According to Crisil, municipal bonds worth Rs 6,000 crore are expected to be issued by financial year 2020 by urban local bodies (ULBs) , riding on policy and regulatory facilitations. This number is four times of what the municipal bodies have raised – Rs 1,550 crore – in the past two decades.  Till date, the total amount raised in municipal bonds is Rs 1,095 crore.

So far, three municipal bodies that have successfully raised funds by issuing municipal bonds. 

The Ghaziabad Municipal Corporation and the Lucknow Municipal Corporation would soon raise a total of Rs 350 crore through municipal bonds. The LMC will raise Rs 200 crore to improve the drinking water supply and the sewage system in the city. On the other hand, the GMC will raise Rs 150 crore for the tertiary treatment of water for industrial usage.

The Greater Hyderabad Municipal Corporation (GHMC) in 2018 raised Rs 200 crore by selling 10-year bonds it launched in December 2017. The issue was two times oversubscribed. The municipal corporation had plans to use the proceeds from the issue to fund a strategic road project worth Rs 3,518 crore.

The Pune Municipal Corporation (PMC) raised Rs 200 crore in June 2017. The civic body sold 10-year bonds, proceeds of which will be used for a Rs 2,300-crore water project in the city. The PMC became the first municipal corporation in 15 years to raise money through this route. This issue was oversubscribed by over six times or over Rs 1,200 crore.

The Ahmedabad Municipal Corporation in early 2019 raised Rs 200 crore through municipal bonds, funds of which are expected to be used to complete projects under the Central government's Atal Mission for Rejuvenation and Urban Transformation (AMRUT) .

Why municipal bonds?

Municipal bonds are debt instruments under which the investor is repaid the fixed amount of principal with interest over a period decided by the municipal body. These bonds come with a tenure of five to seven years. The money raised is then used to fund city development or maintenance projects.

These bonds are a boon for the development of cities especially in times when there are many ambitious infrastructural plans. Bridging the funding gaps, these bonds can help fund various plans, including the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and smart cities and other road projects. The prime need of this project is to equip these cities with water, sanitation, waste and garbage treatment, sewerage, urban transport, street lighting, roads maintenance, etc.

With the rising migratory population in cities, it becomes imperative for the ULBs to create new infrastructure along with upgrading and maintaining the existing facilities.

Credit rating

Just like other bonds, municipal bonds are also given credit rating, showcasing their investment worthiness. These ratings, given by rating agencies such as Crisil, range from AAA to D, with AAA being the highest and D, the lowest. Both PMC bonds and GHMC bonds have been rated AA, making them stable to invest in.