Raising money for ULBs via municipal bonds

A municipal bond is a kind of debt instrument where investors offer loans to local governments.

What is municipal bond?

• A municipal bond is a kind of debt instrument where investors offer loans to local governments.
• They are issued by civic bodies for specific projects and usually have 10-year tenure.
• The Urban Local Bodies (ULB) pays the annual interest on the bonds to the investor at the decided rate.
• The difference between a bank loan and a municipal bond is that any institution can secure a bond only if it has favourable credit ratings.
• The bond helps raise funds from the stock market. The bond also increases the number of investors available to the civic body, as compared to a loan from a single bank.
• Bonds are issued to institutional and high networth individuals.
• The face value of each instrument slot of a municipal bond if a minimum of Rs 10 lakh.
• It can be subscribed by a single investor or multiple investors.

Which city first launched the municipal bond?

• Ahmedabad was the first city in south Asia to launch a municipal bond of Rs 100 crore in 1998, which was completely subscribed.

Significance of Municipal bond

• Able to tap the bond market
• Bonds help ensure improved credit profiles
• Direct transfer of funds by the Centre
• Transparency and efficient revenue generation