Provide credit enhancements for civic bodies: Sebi ED Rao to NaBFID

Rao said that municipal bodies have an investment grade rating, but very few of them are rated AA and above which is considered essential by institutional investors like insurance and pension funds

The National Bank for Financing Infrastructure and Development (NaBFID) should provide credit enhancements for civic bodies which will help increase investor interest in municipal bonds, a senior Sebi official said on Thursday.

The municipal bodies have an investment grade rating, but very few of them are rated AA and above which is considered essential by institutional investors like insurance and pension funds, Sebi's executive director Pramod Rao said.

"NaBFID providing credit enhancements to such municipalities will be able to ensure that we have strong investor interest which comes in," he said at an event on infrastructure finance here.

He said only 100 of the 5,000 civic bodies are rated which leaves a "long tail" of bodies which can raise the money it helped with the credit enhancement. The government has notified NaBFID as a public financial institution.
 

 

The senior official from the capital markets regulator also said that this will not be working in perpetuity for any city body.

He later told reporters that any such move will have to come from the Reserve Bank.

It can be noted that the municipal bonds have not taken off despite repeated push by policymakers over the last many years.

Speaking at the same event, Reserve Bank Deputy Governor M Rajeshwar Rao asked the NaBFID to think about offering innovative solutions like providing partial credit enhancements through rating upgrades or providing first-loss default guarantees.

"As NaBFID develops its internal rating model for credit appraisal, it may also be able to offer products such as credit default swaps (CDS) which would go a long way in ushering confidence in the bond market space," Rao added.

Rao made a slew of other suggestions to Nabfid, especially on the green finance front.

He pitched for Insurers, pension funds need to have a green investing mandate the way they have for corporate bonds.

We also need green market infrastructure institutions and Nabfid can be the catalyst in it, he said, adding that sustainable reporting systems need to be integrated.

He also said that there is a need to get the entities which provide the assurance help to green finance under some regulatory purview.

The infrastructure investment trusts have barely scratched the surface and Nabfid can go to the state governments for exploiting this avenue, he said.