RBI releases ‘Report on Municipal Finance’

MUMBAI, Maharashtra: A recent report released by the Reserve Bank of India (RBI) titled ‘Report on Municipal Finance’ highlights that the size of the municipal budget in India is much smaller compared to other countries. A major portion of the revenue of municipal bodies in India consists of grants, devolution of taxes and property tax.

The report also highlights that the rapid growth of urbanisation in the country is not accompanied with the growth of urban infrastructure, which reflects in the performance of urban local bodies (ULBs) in general and municipal corporations in particular.

It also highlights that ULB’s expenditure is on the rise in areas such as establishment expenses, administrative costs and interest and finance charges, while capital expenditure is minimal. The report highlighted that in the absence of a well-developed bond market, municipal bodies turn to banks, financial institutions and central and state governments for loans.

RBI suggests that ULBs should tap into the capital market for funds by issuing municipal bonds. The general obligation bonds are backed by the ‘full faith and credit’ of the issuer, with the power to tax local residents to pay the bondholders. In contrast, revenue bonds are backed by earnings from a specific project, like toll from a highway. RBI’s report recommends the adoption of a hybrid model by the ULBs where bonds would be backed by the general revenue if the user charges are not sufficient.

The report says that only some of the municipalities in the country have used bonds to raise money. Bengaluru was the first to issue bonds in 1997, followed by Ahmedabad in 1998.