Source: The post Municipal bonds revival and challenges in Indian cities has been created, based on the article “Time for urban local bodies to look at municipal bonds seriously” published in “ Businessline ” on 20th September 2025
UPSC Syllabus Topic: GS Paper 2 – devolution of powers and finances up to local levels and challenges therein..
Context: Municipal bonds offer urban local bodies a route to fund infrastructure. Early issuances began in 1997, but activity stayed muted. Recent policy pushes, incentives, and green-bond momentum have revived interest and debate on feasibility, governance, and remaining bottlenecks.
For detailed information on Financial struggles of Indian municipal corporations read this article here
Why muni bonds, and what changed?
- Early attempts and lull: Bengaluru pioneered issuances in 1997, followed by Nashik and Ahmedabad. Thereafter, the market largely stagnated.
- SEBI’s 2015 push: SEBI issued detailed guidelines in July 2015 to revive fundraising by urban local bodies (ULBs). Uptake still lagged.
- Reforms, yet limited traction: Initiatives like AMRUT and Smart Cities urged corporations to tap markets. A decade on, success remains modest.
- MoHUA–US OTA support: The US Treasury’s Office of Technical Assistance (OTA) partnered with Ministry of Housing and Urban Affairs (MoHUA) to ease fundraising, strengthening systems and know-how.
What incentives and market tools exist?
- AMRUT 2.0 incentives: A first municipal bond issue qualifies for an incentive equal to 13% of the amount raised—that is, ₹13 crore for every ₹100 crore, with a maximum incentive of ₹26 crore. This support reduces the effective borrowing cost and makes projects financially more viable.
- Green bond focus and pooling: For any second or later bond issue, the ULB must issue it as a green bond—limited to sectors like water, sanitation, renewable energy, or urban resilience. Such issues are eligible for ₹10 crore in incentives for every ₹100 crore raised, up to a ₹20 crore cap. Smaller ULBs can access pooled municipal bonds via state entities.
- Benchmarking with IBMX: NSE Indices introduced the India Municipal Bond Index (IBMX) in February 2023 to track high-quality municipal bonds with a total return methodology.
What success shows feasibility?
- Demand for green and ESG: Indore, Ghaziabad, and Pimpri-Chinchwad saw strong market responses, signalling investor appetite.
- Vadodara’s standout issue: Vadodara Municipal Corporation’s ₹100-crore bond in 2022 was oversubscribed 10 times . AMRUT 2.0 incentives cut the effective interest cost to 4.55 percent. This made VMC’s fundraising both cheap and highly successful.
- Governance as the differentiator: Accrual accounting, timely audits, and project-linked use of proceeds underpinned VMC’s success. VMC documented its journey in The Green Book to guide peers.
What hurdles persist and what must improve?
- Structural constraints: Rating agency ICRA flags dependence on grants, weak and delayed disclosures, illiquidity, no secondary market, high compliance, and low credit strength.
- State-level gaps: SEBI chief notes slow asset-monetisation pipelines at the state level are limiting revenue backstops, dampening muni bond uptake and project execution.
- Call to action: Monsoon damage exposes fragile urban services each year. Fiscally strained municipalities should tap municipal bonds to finance resilient, project-linked infrastructure upgrades and lessen dependence on grants.
Question for practice:
Discuss how AMRUT 2.0 incentives and strong governance enabled recent municipal bond successes (like Vadodara), and what key hurdles identified by ICRA still hinder wider adoption.
