What are Municipal Bonds?

Source: The Indian Express

News: Vadodara Municipal Corporation(VMC) is expected to launch municipal bonds and will become the third Urban Local Body(ULB) in Gujarat to use municipal bonds to raise money.

Facts:

  • Ahmedabad was the first city in South Asia to launch a municipal bond in 1998 which was completely subscribed.
  • The Surat Municipal Corporation was the second city in Gujarat to announce bonds in 2018.

What are Municipal Bonds?

  • Municipal Bonds is a kind of debt instrument where investors offer loans to local governments.
  • Purpose: They are issued by civic bodies for specific projects and usually have a 10-year tenure. The ULB pays the annual interest on the bonds to the investor at the decided rate.
  • Difference: 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.
  • Benefits: 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.

How is the Central Government promoting Municipal Bonds?

  • Under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme, urban local bodies (ULBs) are encouraged to tap the bond market.
    • AMRUT Scheme: It was launched in 2015 by the Ministry of Housing and Urban Affairs.It aims to ensure universal coverage of drinking water supply and substantial improvement in coverage and treatment capacities of sewerage and septage along with storm water drainage, non-motorized urban transport and green spaces & parks.
  • The government also pays ULBs Rs 13 crore for every Rs 100 crore raised via bonds subject to a ceiling of Rs 26 crore for each.This incentive takes care of the repayment that the ULB must make to the lender including the interest component.
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