The listing of municipal bonds on the stock exchanges would give a fillip to the development of the secondary market and to issuances of municipal bonds in India, the Reserve Bank of India (RBI) said in a report. This is the first report on municipal finances published by the RBI this year, and the central bank plans to make it a regular, annual publication.

The funds raised by civic bodies through bond issuances were less than 10% of their total borrowings, and are dominated by a handful of major corporations, the central bank said, adding that the municipal corporations in India are heavily dependent on bank borrowings, and loans from the Central and state governments, for their financing requirements. The local bodies met close to 45% of their total borrowings from bank loans in FY20. Loans taken by civic bodies from banks and the governments consisted of over 50% of their overall credit raised in that year. The overall borrowing of civic bodies stood at around Rs 11,000 crore in FY20.

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The RBI also said that credit rating may also play an important role in increasing issuances. There are 94 cities that were assigned credit ratings in 2018, of which 59% received a rating of investment grade or above, highlighting the under-utilised potential for bond financing, the central bank said.

The credit rating has incentivised municipal bodies to undergo reforms to achieve investment grade. All the municipal bond issuances in India were preceded by specific measures taken for credit enhancement of the issuing body, as per the report.

“The municipal bond market is at a nascent stage and hence, credit rating can play an important role in attracting new investors,” the RBI said.

In addition, local bodies must further explore ways to foster alternative and sustainable resource mobilisation through municipal bonds, the central bank said, adding that the policies to improve the environment for financial investment through sound and efficient regulation, greater transparency and better governance can help nurture a vibrant municipal bond market.