economy · 2026-08-22
Only 223 of 4,332 Indian Cities Can Borrow
Photo: Government of India / Wikimedia (GODL-India)
India's cities need ₹11.5 trillion but can't tap markets, not because lenders lack cash, but because most municipalities don't keep the audited books a rating agency needs to say yes.
Why do only 223 of 4,332 cities have credit ratings?
To get rated, a city needs a rating agency to check its latest audited financial statements, revenue stability and debt record, a process that normally takes two to four weeks once the paperwork is ready. Most of India's 4,332 municipalities cannot supply that paperwork: they lack modern, accrual-based accounts, run on unstable revenue, and simply never went through the exercise.
What exactly do rating agencies check before rating a city?
Agencies look at how much revenue comes from a city's own taxes and fees versus government grants, how efficiently it collects what it is owed, its population and tax base, and its track record on past loans, covenants and repayment schedules. Cities also need audited, accrual-based accounts and predictable revenue streams, which most small and medium municipalities lack entirely.
Even among cities that got rated, how many were actually investment-grade?
Of the 223 cities rated by agencies such as CRISIL by 2021, only 95 received an investment-grade rating, the minimum needed to attract bond buyers or bank lenders on reasonable terms. Bond issuance has stayed concentrated in a handful of financially strong cities like Pune, Ahmedabad and Indore, leaving weaker cities locked out of the market entirely.
What happens to a rating if a city keeps failing to report properly?
Ratings are not one-time. Agencies conduct annual surveillance, reviewing fresh audited financials and city finances, and can upgrade or downgrade a rating based on new developments. If a municipality fails to submit required documents or pay surveillance fees, its rating can be withdrawn or marked 'Issuer Not Cooperating,' cutting it off from future market borrowing until it fixes its bookkeeping.
Why has India's municipal bond market stayed so tiny?
Only 22 of India's 4,332 cities have ever sold a municipal bond, raising just ₹4,540 crore since the 1990s. It's not a lack of buyers, it's that almost no city can produce the audited, rated financial accounts investors demand, and most cities depend on state grants rather than their own property tax collections, so lenders can't judge if they'll get repaid.
How small is India's muni bond market compared to other countries?
Tiny. Municipal bonds make up just 0.06% of India's total corporate bond market. In the United States, by contrast, municipal bonds equal about 14% of GDP and 7% of the entire bond market. India's cities also carry only about ₹13,500 crore in total debt across 32 major municipal corporations, with bonds being less than a fifth of that.
Is the market actually growing now, or still stagnant?
It is picking up, from a very low base. FY26 saw roughly ₹1,000 crore raised between April and November 2025 alone, putting the full year on track for about ₹2,000 crore, nearly matching the entire ₹3,000 crore raised over the previous seven years combined. New cities like Agra, Prayagraj, Varanasi and Bhavnagar issued bonds for the first time in 2025.
What would actually make this market ten times bigger?
A big metro finally issuing one. Mumbai, Delhi, Bengaluru and Kolkata have all stayed out so far, even though a ₹100 crore government incentive now exists for any single bond issue above ₹1,000 crore. Analysts treat a clean public bond sale from a major metro as the real signal to watch, since two or three of them jumping in could multiply the market's size within a few years.
Can new funds fix cities that can't already borrow?
Not on their own. The plan pairs money with conditions: public financial institutions would only extend credit if municipalities first fix their property tax collection, standardise their financial reporting, and get rated regularly. NaBFID's proposed guarantee scheme also depends on this, since it works by boosting an existing credit rating, not creating one where none exists.
What exactly is NaBFID offering to fix this?
NaBFID has proposed 'partial credit enhancement', essentially a guarantee that makes a project look safer to lenders. But its own spokesperson said this tool works by improving an existing credit rating profile, meaning a municipality still needs basic bookkeeping and a rating in place first. It boosts bankability, it does not create it from scratch.
Why does fixing property tax collection matter so much?
Roughly half of urban local body revenue currently comes from taxes and fees, with the rest from government grants and investment income. That leaves most cities financially dependent on higher levels of government rather than self-sustaining. A rating agency needs to see reliable, collected revenue before it will vouch for a city's ability to repay debt.
Has India tried building a municipal bond market before?
Yes. A dialogue between the housing ministry, market regulator SEBI and credit rating agencies in February 2026 already flagged this exact problem: cities need continued capacity building, better financial management and stronger institutions before more of them can issue bonds. The push for public financial institutions to condition credit on reform is a continuation of that same unresolved gap, not a new fix.
Source: livemint.com