Union Finance Minister Nirmala Sitharaman may have offered scant proposals in the budget to enthuse Kerala, but her boost for municipal bonds will be tempting for the state. The Minister has proposed an incentive of ₹100 crore for a single bond issuance of more than ₹1000 crore to encourage the issuance of municipal bonds of higher value by large cities. The centre will continue to support the current scheme under Atal Mission for Rejuvenation and Urban Transformation (AMRUT), which incentivises issuances up to ₹200 crore.

The announcement comes hardly three days after Kerala Finance Minister K N Balagopal declared in the state budget 2026-27 that permission will be granted to Municipalities and Corporations to issue municipal bonds for implementing major projects, which are profitable as well as beneficial to the public. The Finance Department was spurred by the first report of the 7th state finance commission to pitch the idea of municipal bonds for large-scale projects in Kerala.

Under AMRUT 2.0, the Ministry of Housing and Urban Affairs proposed incentives for the issuance of municipal bonds. The Urban Local Bodies (ULBs) issuing bonds for the first time and claiming an incentive are now awarded ₹13 crore per ₹100 crore worth of bonds issued, with a total incentive not exceeding ₹26 crore per ULB.

ULBs can also claim an incentive for the second time against the fresh issuance of bonds, if the bonds issued fulfil the criteria of green bonds specified by Securities and Exchange Board of India (SEBI). On issuance of these bonds, ULBs shall be eligible for an incentive of ₹10 crore per ₹100 cr worth of bonds issued with total incentive not exceeding ₹20 crore. Incentive is awarded on 'First Come First Served' basis.

As per the reform toolkit published by MoHUA for AMRUT, there is no specific format for claiming this incentive. If no projects are found suitable for this incentive, the amount saved will be added to project fund or incentive proposed for other reforms as decided by MoHUA.

As per the statistics available with the SEBI till September 2025, 26 civic bodies in the country have raised ₹3,783.9 crore through municipal bonds. Parliament figures show that till March 2025, ₹4,984 crore has been raised through issuance of municipal bonds and green bonds for upgrading urban infrastructure by 13 ULBs namely, Ahmedabad (Municipal bond & Green bond), Amravati, Bhopal, Ghaziabad (Green bond), Hyderabad, Indore (Municipal bond & Green bond), Lucknow, Pimpri Chinchwad, Pune, Rajkot, Surat, Vadodara (Municipal bond & Green bond) and Visakhapatnam and an incentive of ₹331.83 crore has been released.

The 7th Finance commission has recommended constitution of Board of Finance in Kerala to arrange required financial expertise for the local bodies in Kerala to qualify for issue of municipal bonds. "We will submit a policy note to the state government on the framework to be laid out for issuance of municipal bonds by local bodies. From our assessment, we understand that all the municipalities have limitations in absorbing money. This is where the Board of Finance comes into play. It can help local bodies conceive high-budget projects and raise funds through municipal bonds. The union budget proposal of higher incentives is a major fillip to the municipal bonds," said K N Harilal, Chairman of the 7th Finance Commission.

Officials with the Finance Department said that while the proposal is lucrative, there are hurdles. "Credit rating is crucial for any civic body to gain affordable interest rates while issuing bonds. Kerala cities have not undergone a comprehensive assessment in terms of fiscal capabilities so far," the official said.

In 2017, credit rating was done for selected cities in Kerala as part of Smart City Mission and AMRUT 1.0. Of the total 20 ratings ranging from AAA to D, BBB- is the ‘Investment Grade’ ratings and cities rated below BBB- need to undertake necessary interventions to improve their ratings for obtaining positive response to the Municipal Bonds to be issued. Credit Ratings are assigned based on assets and liabilities of ULBs, revenue streams, resources available for capital investments, double-entry accounting practice and other governance practices. None of the cities in Kerala achieved top ratings. Kochi and Thiruvananthapuram were rated BBB while Kollam and Kozhikode received BB+ rating.

A research paper by the National Institute of Urban Affairs shows that the use of municipal bond as an instrument to finance urban infrastructure in India started in the mid 1990s when some of the municipal corporations including Ahmedabad, Bangalore, Nasik, Indore, and Madurai, successfully raised resources through the bonds.