Civic bodies turn to bond market after budget incentive

Multiple municipal corporations are looking to tap the debt market after the Centre announced an incentive for municipal bonds in its budget.

The Bombay Municipal Corporation (BMC) and the Ahmedabad Municipal Corporation (AMC) are in talks to raise ₹1,000 crore issuance, people aware of the matter said. The BMC is currently in the accreditation and credit rating process, a mandatory requirement before any bond issuance.

"BMC and AMC are hoping to raise ₹1,000 crore. There are also many smaller municipalities-Patna, Aurangabad, Nagpur and Bengaluru-that are in the process to raise ₹200 crore bonds," a source told ET.


Municipal bonds are gaining traction as the Centre stepped up efforts to encourage urban local bodies to tap debt markets through targeted incentive schemes. However, the municipal bond market stands at a nascent stage, with an outstanding amount of ₹4,340 crore. The largest issuance was done by Indore Municipal Corporation, which raised ₹244 crore in early 2023, according to Sebi data.

Two schemes have been designed to target both smaller and larger municipal corporations. Under the AMRUT scheme, smaller issuances are supported with incentives of ₹13 crore for every ₹100 crore raised, capped at ₹26 crore.

More recently, the government has introduced a scheme aimed at larger municipalities, nudging larger corporations like Mumbai and Delhi towards issuances of ₹1,000 crore, with an incentive of ₹100 crore. The structure effectively lowers borrowing costs by around 1-1.5 percentage points, enhancing the appeal of market-based financing for urban infrastructure.

"Both states and Centre give grants to municipal corporations to have development at the local level, but they are no longer enough. The policy direction is clearly toward nudging municipalities to tap debt markets alongside grants. Market borrowing brings with it an inherent discipline-transparency, disclosures, and accountability, which is critical for the next phase of urban infrastructure creation in India," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap, a debt advisory firm.