Listing municipal bonds can pave way for developing secondary market: RBI

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The Reserve Bank of India (RBI) on 10 November said that the listing of municipal bonds in the stock exchanges can pave the way for developing the much-needed secondary market for these instruments in India.

A municipal bond is a debt instrument issued by municipal corporations. They are similar to corporate bonds, but are issued by municipal corporations under municipal laws with the permission of the respective state governments.

Municipal laws of only two states explicitly allow borrowing through bond issuances. These borrowings are, however, constrained by several conditions imposed on the types of instruments, prescribed limits and maximum loan repayment period.

The funds raised through these bonds are utilised to finance projects for socio-economic development.

Municipal bonds have very less volume compared to corporate bonds, hence trading in the secondary market for this security is less. However, bonds issued by various municipal corporations in the past few years were also very less.

The lack of a secondary market for municipal bonds has been a critical constraint in attracting a more extensive investor base for these securities.

"Policies to improve the environment for financial investments through sound and efficient regulation, greater transparency, and better governance can help nurture a vibrant municipal bond market," the RBI said in a report on municipal finances.

Recently, however, the demand for the infrastructure has been growing and a renewed thrust from the Centre over the past few years, through schemes like AMRUT, has led to fresh issuances of municipal bonds by nine municipal corporations.

As per data available in the report, the issuance of municipal bonds was highest in 2018 at Rs 2,710 crore since 1997. In 2019, issuances stood at Rs 500 crore, in 2020 worth Rs 200 crore, and Rs 150 crore in 2021.

Recent instances of bond issuances have demonstrated that bond financing can be a viable alternative for raising resources for municipal corporations.