Municipal debt is a government loans, market loans (open market and loans from financial institutions), interest bearing internal loans and external (World Bank) borrowing
Municipal debt in India is regulated by the Ministry of Housing and Urban Affairs and the Reserve Bank of India. ULGs need to comply with the guidelines issued by these regulatory authorities while issuing debt. The guidelines aim to ensure that ULGs have adequate revenue streams to repay their debt, and the debt issuance process is transparent and accountable.
While the Loan Authorities Act of 1914 provides the general legal framework for municipal borrowing, relatively more freedom is given to municipal corporations as compared to municipalities on borrowing options; limits to borrowing, lateral guarantees, loan repayment arrangements, and investment of sinking fund surplus.
Loans form another source of ‘income’ to the urban local government. Borrowing by the urban local government is subject to both statutory and administrative restrictions. These restraints have been imposed lest the financial position of the local government becomes perilous as a result of reckless borrowing. Municipal bodies are obliged to borrow from state government and other agencies to meet emergencies and for capital expenditure which they cannot afford out of their revenues.
However, in practice, municipal corporations are allowed to borrow from the market any amount based on their repayment capacities. Even though all market borrowings require approvals from the state governments, in many cases state guarantees are demanded. However, institutions such as HUDCO and IL&FS have started replacing state guarantees with bank guarantees
Debt financing is not a significant part of capital expenditure in majority of the Corporations in India The low level of debt financing is reflected by the majority of municipal corporation in India
Debt financing is not effectively managed by the corporations, mainly due to poor budgeting, accounting and financial management systems. Use of incremental approach to budgeting, unrealistic projection of resources, excessive reliance on “advances” from the suspense account, poor expenditure management, non assignment of loan charges to specific accounts, etc. are some of the accounting and financial management issues worth further attention.
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FD Planning Community Forum Discussion
- State Finance Commissions and Rural Local Bodies Devolution of Resources
- Interview with B K Sinha – The Municipal midas
- Municipal bond in India
- Bilateral and Multi-lateral Financial Institutions
- Cost recovery
- Investment needs and Budgeting for Infrastructure and Service in Metro towns
- Subsidy Reduction
- Revenue Sources of Controlling Authorities
- Public Private partnership
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