India's urban local bodies (ULBs) have potential to raise Rs 1,000-Rs 1,500 crore per annum over the next few years through issuance of municipal bonds and they should go beyond traditional revenue sources to raise funds to fuel future growth, said a report.

"Our estimate suggest that Rs 1,000-1,500 crore per annum could be raised through municipal bonds over the next five years by the larger municipals with investment grade (credit rating)," said the report by Care Ratings here.

The Securities and Exchange Board of India (SEBI) recently released a paper on the municipal bonds market, which has brought in fresh focus on this relatively muted segment.

The report said the larger ULBs with a good credit rating could be the ones to access this market to begin with.

Currently, municipal bodies rely largely on their own revenue sources and the grants they receive from the State and Central Governments to fund their projects.

However, these two primary sources are not expected to suffice given the scale of infrastructure development and upgradation that is required to meet the growth aims at various levels, the report said.

"Given the fast pace of reforms being witnessed in the country and the objective of creating smart new cities, the requirement for funding would increase over the next decade."



Additionally, large-scale urban migration exerts pressure on the ULBs to create new urban infrastructure while maintaining or upgrading the existing facilities that have been built over the years, the rating outfit said.

Care said civic bodies which issue municipal bonds should be provided additional Government grants. "A clause can be introduced to the effect that municipals which raise debt by way of bond issuances are beneficiary to additional grants from the Centre and State Governments that go beyond the allocations as specified by the Finance Commission."



It said borrowings of the municipal corporations from financial institutions such as HUDCO can be linked to the bond market. There is a need to spur investments in municipal bonds by making them attractive both at retail and wholesale level.

Care suggested that organisations such as HUDCO can provide guarantee to the bonds issued by civic corporations which could provide security of these instruments.

"An escrow mechanism can be created wherein the first charge of pre-specified revenue should be kept aside for paying the interest and principle amount to the guarantee provider," the report added.