Coimbatore’s rating makes it difficult to float municipal bonds

Recently the Pune Municipal Corporation, Maharashtra, issued bonds worth ₹200 crore.

It was listed on the Bombay Stock Exchange and was oversubscribed six times as the urban local body had a AA+ rating.

Pune was one of the 70-odd cities that underwent rating and topped the list with a good score, beating even the New Delhi Municipal Corporation. But Pune is not just alone, there are 26 more cities that are on their way to issuing municipal bonds.

Move over to Coimbatore. The Coimbatore City Municipal Corporation says there is no proposal to issue municipal bonds as the State Government has decided that urban local bodies will tap funds through the Tamil Nadu Urban Finance and Infrastructure Development Corporation or the Tamil Nadu Urban Infrastructure Financial Services Limited.

One of the arguments that weighed in the minds of the policy makers when the issue was discussed is that the urban local bodies will have to pay interest on the bonds, a liability compared to getting interest-free loans from one or other agencies.

But there appears to be more to the issue. Officials in the know of things say that in Coimbatore’s case, the issue is that it might have to pay a higher interest rate as its credit rating is poor.

The Corporation, in fact, went in for credit rating as part of the mandate that the Central Government gave under the Smart Cities/AMRUT schemes and came out with a ‘B’ rating that fell under the non-investment grade category.

That will mean that the Corporation will have to pay higher interest rate to attract investment. Pune pays 7.54 % on its bonds.

Sources familiar with the rating exercise say that the Corporation, like other urban local bodies, was assessed based on property tax collection, own revenue source, population, future development potential, debt servicing capacity and liability.

The Corporation’s state of finances, delayed payments to contractors, poor cash flow and failure to collect user charges have played a role. With the rating, the Corporation’s bonds, if floated, will attract fewer investors as the risk potential is higher.

The Corporation officials say that though it has a ‘B’ rating, it has fared better than other urban local bodies in the State that went in for the rating.