The Indian municipal bond market is expected to raise more than Rs 1,500 crores in FY2025-26 as government support increases and more focus is laid on Urban Local Body (ULB) funding. An ICRA report predicts that with increasing focus on Environmental, Social, and Governance (ESG) projects, there will be a higher incidence of issuance for green and pooled bonds.
Steady Growth Since FY2018
The Indian municipal bond issues have gained steady momentum since FY2018, with total amount mobilized crossing the Rs 2,600 crore-mark. This situation mostly contrasts with the period from FY1998 to FY2005 when funds mobilized were below Rs 1,000 crore. The growth of municipal bonds, in this case, was driven mainly by a fiscal push by the government and by regulatory push via SEBI.
SEBI Regulations and Government Incentives Driving Issuance
One of the milestones was the introduction in 2015 of SEBI’s “Issue and Listing of Debt Securities by Municipalities” Regulations, which defined municipal bonds for the first time and attracted investors. The government also incentivized municipal bonds starting from FY-18, when Rs. 13 crores was rewarded for every Rs. 100 crores issuance of bond. This scheme catapulted municipal bonds as the instrument of first choice for raising funds by ULBs.
Biggest Challenges That Hinder the Growth of Municipal Bonds
Despite the rapid pace of development, there are still numerous impairments threatening to limit the potential of the municipal bond market. They include:
- Owing to an excess dependency on government subsidies (here ULBs depend on subsidies from central and state governments, in turn limiting the growth of alternate credit powers).
- Failure to ensure timely financial disclosures (most ULBs do not issue audited financial statements, deterring investors).
- Lack of liquidity and absence of a secondary market (since investors do not have an exit, market participation diminishes).
- Stringent compliance mechanisms (with stricter disclosure and compliance norms initiated by SEBI).
- Uncreditworthiness of ULBs (most ULBs are unable to satisfy bond-rating stipulations, thereby capping the issuances).
Credit Enhancements Raise Investor Confidence
In the time since FY2018, every municipal bond issue has been supported by means of structured payment mechanisms, which will eventually drive credit enhancement. Although ULB finances are not uniform across geographies, it follows that since then, all municipal bonds have been rated more favourably at an AA-category level, therefore more appealing to investment.
Outlook: Issuance increasing but modest share in the market
Somewhat over 10 new municipal bond issues are expected in FY2025-26, with total fund-raising above Rs 1,500 crore, as per ICRA. However, municipal bonds still remain a tiny fraction of the overall issuance of central and state government bonds. For sustainable growth, the experts pointed towards efforts to provide financial transparency, improved credit worthiness of ULBs, and development of secondary markets that will attract long-term investors.