Municipal bonds are bonds raised by municipal bodies or local governments for financing core urban infrastructure facilities like drinking water, sanitary systems, solid waste disposal systems, road, hospitals etc. Generally municipal bonds are broadly of two types. Municipal bonds are the ideal instruments for raising resources, channelling funds from capital market into infrastructure development.
They are long-term in nature, unlike bank loans that are of limited tenure of three to five years. The municipal bonds with a longer maturity will increase the urban local bodies’ financing capacities, in addition to providing opportunities for long-gestation infrastructure development. Debt markets also increase urban local bodies’ access to capital for tax supported projects.
The municipal bond had its glimpse in 1997, but still the market for municipal bonds didn’t pick-up. Mere 13 municipal bond issuances have been made so far for an amount of Rs.7.33 billion. Municipal bonds today makeup a miniscule 0.1 per cent of the total Indian bond market compared with 10% in U.S.
The constraints being faced by municipal bond market can be summarized below:
Firstly, the investor perception of municipal governance is poor due to difficulty in analysis of their financial performance.
Secondly, the investor base needs to be broadened by enabling the institutional investors like provident funds, insurance companies and mutual funds to invest in municipal bonds.
Thirdly, credit rating of urban local bodies will help in assessing funds from the capital markets, by making- urban local bodies visible to a wider investor base including foreign investors.
The Urban Development Ministry of the Central Government has proposed to raise the amount a municipal body can raise as tax free municipal bonds for a specific project to Rs.600 crore from the present Rs.300 crore. In addition, it is also proposed that the local bodies would be allowed to raise 100% of funds required for a project as against the present 50%. Although, there is no cap on the amount a municipal body can raise as bonds, except a cap on each individual project.
1. General Obligation Bonds (GOBs):
GOBs secured by the ‘full faith and credit’ of the local body. In other words, debts repayment is based on the overall credit standing and revenue sources of the municipality. These kinds of issues are more favoured by the corporations who have consistent stream of revenues currently and have sufficient debt-servicing capacity. GOBs are usually issued for shorter maturities.
2. Revenue Bonds (RBs):
RBs on the other hand are project specific and can, therefore, be issued by Municipalities or by Special Purpose Vehicles (SPV) created for the purpose of setting up of specific projects. Here the debt is serviced from the income stream generated by the project. The investor profile for the municipal bond market would be a combination of institutional and individual investors.
Municipal bonds are bonds issued by any municipal organization including cities, towns etc. The purpose of these bonds is for general expenditures or to fund specific projects such as highways, new schools etc. The development of a municipal bond market to finance long-term capital investments in urban basic services is a recent phenomenon in the Indian markets. Most of the bond issues by municipal corporations have been through private placements and have been issued as ‘structured obligations’ (SOs).
Structured obligations are a special category of ‘general obligation bonds’ that are issued based on overall financial health of the municipal bodies with certain revenue sources mortgaged for repayment purposes. Generally, municipal bonds are considered safer than corporate bonds because a local government is far less likely to go bankrupt than a corporation.