At least four municipal corporations from Uttar Pradesh are looking to tap the debt market for fundraising.
Municipalities from Kanpur, Prayagraj, Agra and Varanasi are considering raising close to Rs 500 crore through the issue of municipal bonds, according to two people with direct knowledge of the matter, who spoke on the condition of anonymity.
While all four bodies will be entering the municipal bonds space for the first time, the process is likely to gain momentum at different stages between September and December.
Kanpur
While Kanpur Nagar Nigam’s valuation stands at Rs 13,000 crore, the body is planning to raise Rs 100 crore from a 10-year municipal bond issue. Since the term-sheet has been finalised and the issue has been sent for the final credit rating process, it is expected to hit the market between October and December, said KN Shukla, chief financial officer of Kanpur Municipal Corporation.
“We have Care Ratings and India Ratings (and Research) doing the credit rating process. The munibond is for the development of Amrut scheme through which water supply will improve. After this issue, we will go for another issue of municipal bonds for commercial purposes,” Shukla told BQ Prime over the phone.
Prayagraj
Prayagraj Nagar Nigam is expected to raise close to Rs 50-75 crore from a five to seven-year municipal bond issue, the first person quoted above told BQ Prime. The municipality's term-sheet has been finalised and the issue has been sent to India Ratings and Research and Acuité Ratings and Research for the final credit rating process, the person said.
This municipal bond will come into the market between September and October, the person quoted above said.
Agra And Varanasi
Both Agra and Varanasi municipalities are in the middle of finalising the structure of their respective bond issues and the process is expected to conclude by Aug. 25, the person quoted above said.
Agra Nagar Nigam will raise around Rs 75 crore and Varanasi will raise around Rs 100 crore, the person said. If things go according to the plan, both are expected to hit the market by November.
“Yes, there are plans to raise funds via municipal bonds and we are working on it but we can’t share any details as of now,” Vinod Kumar Gupta, deputy municipal commissioner of Agra Nagar Nigam confirmed to BQ Prime.
Municipal Bonds Credit Rating Process
Popularly called 'munibonds', these financial instruments are issued by municipal corporations and other associated bodies in India to raise funds. Since these bonds come with a fixed maturity period, investors tend to earn a fixed interest rate on them.
According to the Ministry of Housing and Urban Affairs, credit rating is an assessment of an urban local body's ability to pay its financial obligations. It tends to directly impact the interest rates that these bodies pay on such bonds.
India Ratings and Research did not respond to queries from BQ Prime related to the municipalities they are rating.
However, Anuradha Basumatari, director of public finance group at India Ratings and Research explained the factors that the agency takes into account while assigning these credit ratings.
The agency looks at three primary profiles: operational profile of the ULB under consideration, financial and credit. Of these, one of the key sub-areas of rating is the economic profile of the city.
“When we look at the city, we avoid looking at the population; we tend to assess if the city is growing in terms of addition of property and how the corporation’s work is helping in that growth. We also review the level of urban infrastructure and the delivery of civic services like water supply, transportation etc.,” said Basumatari.
Apart from these, some other key areas that the agency looks at are if the corporation has taken any additional funds to improve its services, its management style, nature and utilisation of capital expenditure, debt profile, revenue composition—such as tax-driven or non-tax driven—and so on, she said.
While queries sent to Care Ratings remained unanswered till the time of publishing this story, Acuité Ratings refused to comment on the same.
Is It The Future?
“If you look at India, with the kind of cities we have here, municipal financing is the future,” said Ajay Banga, president, World Bank at a G20 side-event on July 16, during his recent visit to India.
“A lot of cities in India are very creditworthy ... they may not have the data to present it in a form that enables private investors to comprehend the creditworthiness of the city,” he said.
The scope and utility of municipal bonds has been a topic of debate for many years, with many largely believing it to be an important source of funding for better life in cities, but untapped.
“Due to factors like creditworthiness of municipal corporations and ability to generate ample revenue via taxes and fees etc., municipal bonds are considered to be a low-risk investment and a relatively safer option,” said Dr Niranjan Hiranandani, national vice chairman of the National Real Estate Development Council.
A total of 12 Indian municipal corporations raised Rs 4,584 crore via municipal bonds between 2017 and 2023, according to the data from Prime Database, indicating that munibonds are slowly being chosen as a source of funding.
But a problem with current issuances is the size. While Union government has been pushing for municipal bonds in many ways, the current issuances in the range of Rs 100-200 crore are small and not sizeable, said Srikanth Vishwanathan, chief executive officer of Janaagraha, a Bengaluru-based think-tank.
“The prospect of municipal bonds is very high but India is not doing very well. Because the current issuances are small, they are not actively traded at the market as people are just subscribing to them in order to hold till maturity," Vishwanathan said. "This is not helping in the creation of active and vibrant market to fund long-term urban infrastructure.”
Another big challenge in India is that since fundamentally these bonds are about high coupon rate and high return, to raise these bonds, one needs to have enough operational cash flows, said Barnik Maitra, managing partner, India and South Asia at Arthur D. Little.
“Outside the top 100 cities, it is not sure how fundamentally viable municipal corporations are in terms of their revenue. It’s a small market in India with enough potential to grow 10 times in the next five years. So, there is upside but unfortunately, mostly for large or established metro centres only,” Maitra said.
With Indian cities witnessing rapid urbanisation, municipal bonds might aid the increasing growth needs but only after viable structuring and other issues being addressed.
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