Event: Working Session on Developing India's Municipal Bond Market: Constraints to Overcome 

Organized by: 

- Ministry of Urban Development, GOI

- Ministry of Finance, GOI

Associated by:

- Indo-USFIRE (D) Project 

- National Institute of Urban Affairs 

Date: 29 July 2008

Venue: Conference Room, NIUA, New Delhi

The Government of India's Jawaharlal Nehru National Urban Renewal Mission aims to improve urban infrastructure and governance in selected cities. Various JNNURM reforms are important initiatives that will enable Urban Local Bodies (ULBs) to access the capital market. To date, 14 ULBs and 2 State Level Agencies have issued bonds valuing Rs.1549 crore. However, very few ULBs are planning to access capital markets for their capital projects. There are supply and demand side constraints for India's Municipal Bond Market. In this context, a Working Session was organized by the Ministry of Urban Development (MoUD) and Ministry of Finance (MoF) in association with FIRE-(D) and NIUA on July 29, 2008.

Prof. Chetan Vaidya, Director, NIUA welcomed the participants representing MoUD, MoF, RBI, SEBI, International Organizations, IDFC, IRDA, insurance companies, and other stakeholders. Mr. A.K. Mehta, Joint Secretary (UD) gave a brief background and the purpose of the meeting. Dr. M. Ramachandran, Secretary (UD), in his Key Note address, said that large amount of investment is required for urban infrastructure. JNNURM funds are provided by the Government of India to support the development of basic infrastructure in the mission cities, and it is expected that the cities shall access capital market for their overall financing requirements. However, this is not happening and it is a matter of concern. Dr. Ramachandran mentioned that the reform agendas of the JNNURM reforms are helping ULBs to improve their credit worthiness, and will help to address the demand-side constraints on the use of municipal bonds. These reforms will strengthen the governance and management of the ULBs. He stated that the discussion at the Working Session should provide inputs for removing the supply-side constraints for India's bond market.

Mr. George Deikun, Mission Director, USAID/India said that USAID assisted the Ahmedabad Municipal Corporation in issuing the first municipal bond in India without a state guarantee, and also Karnataka Urban Infrastructure & Finance Corporation (KUIDFC) in issuing a Pooled Finance Bond. He said that improving urban infrastructure is necessary for India to achieve 8-9% annual economic growth rate.

Dr. K.P. Krishnan, Joint Secretary, MoF said that there is need to develop a financially sustainable municipal bond market. He said this meeting should focus on how more debt funds can be attracted to urban infrastructure in the next 2-3 years. He further added that the legal and regulatory framework in municipal bond market in India is largely in place. He mentioned the major supply-side constraints are: institutional investors such as insurance companies are constrained by restriction imposed by IRDA; commercial banks prefer to invest in short- to-medium term as their assets are short- to-medium term in nature; there is lack of credit enhancement for the municipal bonds; and there is a cap on interest rate on tax-free municipal bonds. Dr. Krishnan urged that appropriate recommendations should be made to Insurance Regulatory and Development Authority (IRDA), Reserve Bank of India and Pension Fund Regulator and Development Authority (PFRDA) and Government of India to change some of their regulations to facilitate investment in municipal bonds by Commercial Banks, Insurance companies and Pension Funds, etc.

There were extensive discussions on various issues including the need for a bankruptcy law for ULBs in India; possibility of declaring municipal bonds in the prescribed list of investments for the SLR requirements; asset-liability mismatch between investments by banks vis-à-vis infrastructure projects; lack of liquidity in India's bond market due to a variety of reasons; limited capacity of ULBs to service loans; unduly long time taken by the government in assessing municipal bond applications by cities; and lack of professionalism in ULBs, etc.

Mr. A.K. Mehta, JS, MoUD explained how various reforms introduced by the MoUD are helping ULBs to improve their credit rating. He mentioned that the ULBs do not have the capacity to develop projects and implement them. He added that ULBs should explore the possibility of issuing taxable bonds; MoUD is looking into issues regarding improved budgeting, accounting, auditing in ULBs; and MoUD will explore the possibility of reducing the time required by the government in approving tax-free bond application. The Working Session resolved to make recommendations to the responsible institutions regarding the supply side constraints. The meeting ended with thanks to the chair and all participants.