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Between financial years 2011 and 2017, there were no issuances of municipal bonds in the country.
"We expect Rs 6,000 crore of municipal bonds to be issued over the next three financial years from progressive and proactive urban local bodies (ULBs), riding on policy and regulatory facilitations," Crisil said in a report today.
Government and market regulator Sebi have been working to improve ULBs' access to the capital markets
In June 2017, Sebi had notified guidelines on disclosure of financial information by ULBs at regular intervals, and audit of accounts to increase transparency, to improve the prospects for municipal bonds.
The government has also announced an interest subsidy scheme to make such issuances competitive.
The report said while the amount may seem small in the context of the massive infrastructure needs of the cities, it is more than four times what has raised --Rs 1,350 crore -- in the past 20 years. This June, Pune Municipal Corporation had raised Rs 200 crore from 10-year bonds.
The government moves to develop civic infrastructure through the Amrut and Smart City missions require significant capital spending by ULBs.
The report estimates ULBs will have to borrow nearly Rs 15,000 crore to fund these projects through the financial year 2023. These will have to be funded by market borrowings in addition to government grants.
Several ULBs have initiated their bond issuance process by appointing transaction advisors, Subodh Rai of Crisil said, adding more such issuances are in the offing.
"That's because bonds offer ULBs structuring flexibility through longer tenures, annual interest payments, and fixed coupon rates compared with bank loans," Rai said.
Capital market also has a large investor base and can turn out to be more competitive than bank borrowing," he said.
The agency expects a gradual increase in investor interest in municipal bonds over the medium-term.
The implementation of Sebi guidelines will improve transparency and can go a long way in helping ULBs access the capital markets, it added.