India has thousands of urban local bodies (ULBs) — municipal corporations, municipal councils, and nagar panchayats — responsible for building and maintaining roads, water supply, sewage systems, and other city infrastructure. Yet, only a small fraction of them carry a formal credit rating.


According to a recent Livemint report, just 223 ULBs across the country currently hold credit ratings. Set against India's total ULB count — which runs into the thousands — this leaves the overwhelming majority of towns and cities without a rating, and therefore largely outside the reach of the municipal bond market and other forms of structured credit.


This isn't a new problem, but it is a persistent one. Municipal bonds have existed in India since the late 1990s, and SEBI has had a dedicated regulatory framework for them since 2015. Programmes like AMRUT and AMRUT 2.0 have specifically pushed and incentivised ULBs to get rated and raise money through bonds. Despite this, the base of rated — and investment-grade — ULBs has grown slowly.


Why does this matter?


A credit rating is the starting point for almost any form of formal borrowing. For a ULB, it signals to lenders, bond investors, and institutions such as pension and insurance funds whether the local body can service debt reliably. Without a rating:

• ULBs cannot access the municipal bond market at all, regardless of how strong their underlying finances might be.
  
  

• They remain dependent on state and central government grants and transfers, which are periodic and not always predictable.
  
  

• Even ULBs that do get rated often land in lower rating bands, since very few are assessed as AA and above — the threshold many institutional investors look for.
  
  

What's holding ULBs back from getting rated?


A few recurring issues show up across most assessments of India's municipal credit landscape:

• Inconsistent accounting practices — many ULBs still don't follow standardised, accrual-based accounting, making financial statements hard to assess.
  
  

• Weak own-source revenue — property tax collection and user charges are often inefficient or politically sensitive to raise.
  
  

• Limited fiscal autonomy — ULBs have restricted ability to set their own rates and charges, which affects predictability of cash flows.
  
  

• Low awareness or capacity — many smaller ULBs simply lack the internal financial and documentation capability to go through a rating exercise in the first place.
  
  

The bigger picture


India's municipal bond market remains tiny compared to global peers — a fraction of the size seen in markets like the US. With India's urban infrastructure financing needs running into lakhs of crores over the coming decade, expanding the base of rated ULBs isn't optional — it's a prerequisite for tapping capital markets at scale. Recent policy moves, including enhanced incentives under AMRUT 2.0 and consultation papers from SEBI on strengthening municipal bond regulations, suggest that this gap is on the regulatory radar.


Key Highlights

• Only 223 ULBs in India currently hold a credit rating, out of thousands of municipal bodies nationwide.
  
  

• A rating is a prerequisite for accessing the municipal bond market — unrated ULBs cannot participate regardless of their financial health.
  
  

• Very few rated ULBs achieve AA or higher, the level typically sought by institutional investors like pension and insurance funds.
  
  

• Weak property tax collection, inconsistent accounting standards, and limited fiscal autonomy are recurring reasons ULBs stay unrated or under-rated.
  
  

• Government programmes such as AMRUT 2.0 continue to push and incentivise rating exercises, but progress remains gradual.
  
  

Conclusion

The rating gap among India's ULBs reflects a structural challenge — not a lack of intent, but a lack of financial readiness at the local body level. As urban infrastructure demands grow, the ability of municipalities to access market-based credit will depend heavily on how quickly this base of rated, investment-grade ULBs can be expanded. For any entity — municipal or corporate — the pattern holds: understanding where you stand from a creditworthiness perspective, and preparing accordingly, is the first step toward better access to capital.


Disclaimer

This content is prepared for general informational purposes only and is based on publicly available news reporting and industry sources. It does not constitute investment, financial, or legal advice, nor does it represent an assessment or rating of any specific entity. FinMen Advisors Private Limited is an advisory firm and is not a SEBI-registered credit rating agency; credit ratings are issued solely by authorised credit rating agencies. Readers are encouraged to verify facts and figures from original sources before relying on them for decision-making.


Source: Livemint