Listing of civic bonds on stock markets can pave the way for developing the much-needed secondary market for these instruments, according to the RBI’s maiden report on municipal finances, reports Business Line.
There has been no appreciable improvement in the functioning of municipal corporations (MCs) despite the institutionalisation of the local governance structure.
The report, put together by the RBI’s Department of Economic and Policy Research (DEPR), said the bond financing route needs to be explored on a wider scale to meet the capex expansion plans of MCs.
“With own revenue generation capacity of municipal corporations declining over time, dependence on the devolution of taxes and grants from the upper tiers has risen. This calls for innovative financing mechanisms,” said the RBI report, which is based on a compilation and analysis of budgetary data for 201 municipal corporations (MCs) across all States.
The rapid rise in urban population density, however, calls for better urban infrastructure and, hence, requires greater flow of financial resources to local governments.
The report noted that the municipal corporations mostly rely on borrowings from banks and financial institutions and loans from Centre/State governments to finance their resource gaps in the absence of a well-developed market for municipal bonds.
The report said that the corporations need to adopt sound and transparent accounting practices with proper monitoring and documentation of their receipts and expenditure items, and explore innovative bond and land- based financing mechanisms to augment resources.
Property tax reform and development of a vibrant municipal bond market may provide a boost to municipal finances, the report said.
“Policies to improve the environment for financial investment through sound and efficient regulation, greater transparency, and better governance can help nurture a vibrant municipal bond market. Listing municipal bonds in the stock exchanges can pave the way for developing the much-needed secondary market for municipal bonds,” it added.
The availability and quality of essential services for the urban population have remained poor, per report.