1 week ago
India’s Cities Face Funding Gap as Municipal Ratings Remain Scarce
Indian cities need a lot of money to build roads, water systems, housing and public transport.
However, most city governments do not have credit ratings, which makes it difficult for them to borrow from investors.
Only 223 out of 4,332 urban local bodies have ratings.
A credit rating helps lenders judge whether a city or project can repay money.
Public financial institutions may help cities improve tax collection, bookkeeping and financial reporting.
NaBFID may also provide guarantees that make municipal projects look safer to lenders.
Cities could raise money through municipal bonds, but this market is still very small in India.
Surat’s green bond experience is being cited as an example of how borrowing can fund useful public projects.
Only 223 of India’s 4,332 urban local bodies have credit-rating reports.
Cities are estimated to need ₹11.5 trillion in capital expenditure between FY27 and FY31.
NaBFID has proposed partial credit enhancement for eligible municipal projects to improve their bankability.
Municipalities have raised ₹4,540.34 crore through 31 bond issuances by about 22 ULBs.
Officials cited weak financial systems, fragmented projects and inadequate revenue ring-fencing as key barriers.
- Who
- India’s urban local bodies, public financial institutions, NaBFID and potential municipal-bond investors.
- What
- A framework is being discussed to improve municipal creditworthiness and expand market-based financing for urban infrastructure.
- Where
- The discussions were held in New Delhi.
- When
- The issue was discussed at the two-day PSB Conclave 2026; the funding need covers FY27 through FY31.
- Why
- Cities face major infrastructure needs, but limited credit ratings, weak financial systems, fragmented projects and dependence on government grants restrict borrowing.
Case for Expanded Municipal Financing
Concerns About Municipal Borrowing
Credit enhancement
Case for Expanded Municipal Financing
Supporters say partial guarantees and credit enhancement from institutions such as NaBFID could improve project ratings, bankability and access to institutional financing.
Concerns About Municipal Borrowing
Critics’ concerns, as reflected in the discussions, are that guarantees cannot substitute for sound bookkeeping, accounting, financial management and dependable municipal cash flows.
Municipal bonds
Case for Expanded Municipal Financing
Advocates point to Surat’s green bond as evidence that market financing can fund water treatment, renewable energy, waste processing and electric buses while reducing dependence on grants.
Concerns About Municipal Borrowing
The market remains shallow, with only about 22 ULBs issuing bonds and municipal bonds representing just 0.06% of India’s corporate bond market.
Project structures
Case for Expanded Municipal Financing
Officials propose ring-fencing project revenues, using escrow mechanisms and pooling smaller projects to create larger, more investable portfolios.
Concerns About Municipal Borrowing
Weak disclosure, fragmented project pipelines and unclear separation of project revenues currently make it difficult to attract long-term institutional investors.
Key facts
- Urban local bodies
- 223 of 4,332 ULBs currently have credit-rating reports.
- Capital expenditure need
- An estimated ₹11.5 trillion is required between FY27 and FY31.
- Indicative credit opportunity
- An estimated ₹5.8 trillion credit opportunity exists over the same period.
- Municipal bond issuances
- ULBs raised ₹4,540.34 crore through 31 issuances by around 22 ULBs as of 31 July 2026.
- Market comparison
- India’s municipal bond market equals about 0.06% of its corporate bond market, compared with 7% in the United States.
- Typical bond terms
- Recent bonds generally had AA or AA+ ratings, five- to 10-year maturities and coupons of about 7.6% to 8.5%.
- Revenue structure
- About half of ULB revenue comes from taxes and fees, with the remainder largely from grants and investment income.
Quotes
NaBFID spokesperson
Spokesperson for the National Bank for Financing Infrastructure and Development
“PCE is closely linked to credit ratings and is equally applicable to municipal projects. From NaBFID's perspective, PCE may be extended to eligible municipal projects to enhance their credit rating profile, thereby improving bankability and facilitating access to institutional and market-based financing”
livemint.com
Hemali Boghawala
Former mayor of Surat Municipal Corporation
“The experience of Surat shows how greater participation of urban local bodies in the municipal bond market can directly translate into better urban infrastructure and public amenities”
livemint.com
Sources
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