Do you know what Municipal bonds are?

Have you ever wondered how Governments fund their developmental work? Easy answer is - Taxes. In India, Central and State Governments raise funds from the taxes paid by the citizens. However, apart from taxes there are other means through which the Governments fund their projects for e.g. through capital markets. Central Government may raise funds through the sale of securities, bonds and treasury bills, while State Governments can raise funds through developmental loans. Though the third tier of our governance i.e. local municipal governments form the weakest link in terms of financing capabilities, they have been empowered by specific guidelines to raise funds by issuing Municipal bonds. These can be thought of as loans that citizens make to local governments, and are used to fund public works such as bridges, roads and other infrastructure.

Bangalore Municipal Corporation was the first local govt to issue municipal bonds in 1997. However, municipal bonds lost ground after they failed to raise the desired amount of funds. To revive the funding mechanism, the Securities and Exchange Board of India circulated detailed guidelines in 2015 for urban governments to raise money by issuing revenue bonds.

Just last week, UP Government permitted four Municipal Corporations to issue municipal bonds to meet expenses on developmental works. In 2019, Lucknow Municipal Corporation had become the first civic body in UP to bring a bond of Rs 200 crore. Other city governments like in Pune and Chennai are also thinking of exploring this option as their current sources of revenue are becoming inadequate.

Apart from this, there is another set of bond that is solely dedicated to raising money for climate and environmental projects, known as the Green Municipal bonds. This year in April, Ghaziabad Nagar Nigam raised India’s first Green Municipal bond issue of ₹150 crore to recycle waste water into drinking water.

How does your city’s urban local govt finances its projects? To know about UP, read.