Unlocking Green Finance for India’s Urban Local Bodies through Municipal Green Bonds

Context

It is estimated that over 40 per cent of India’s population, or 630 million people, will reside in Indian cities by 2030; this figure will climb to 814 million by 2050. This urban population will need a corresponding scale of civic services. Moreover, with rising threats induced by climate change, enhanced

Urban climate adaptation plans will be required as well. Significant investments in the order of billions of dollars will be needed on these fronts.  Urban Local Bodies (ULBs), as the third tier of governance in India, sit at the frontline of this transformation, but face substantial capacity and financing constraints. To address these hurdles, scalable financing mechanisms are essential. One such mechanism is the issuance of municipal bonds (muni bonds), including the rising category of municipal green bonds (muni green bonds).

This report touches upon the financing landscape of ULBs, the evolution and status of the muni bond market in India, the emergence of green-labelled bonds, and proposes a way forward through dedicated focus on key thematic areas by ULBs, termed as the RISE framework.

Muni Bond Market in India

Since 1997, there have been 50 muni bond issuances, totaling approximately INR 6,933 crore (~USD 850 million). These issuances are geographically concentrated, with just 10 municipal corporations (MCs) accounting for over half of them. Additionally, all 50 issuances are from only 8 states.

Although India’s muni bond market has existed since the late 90’s, it still remains at an incipient stage of market maturity. Factors impeding its growth have cut across both systemic and entity levels:

• Systemic: Political economy challenges, regulatory ambiguities, lacklustre track record and absence of liquidity in the muni bond market, and crowding out by grants and concessional loans.
• Entity: Lack of fiscal autonomy; Weak credit ratings; an absence of modern financial practices; and a lack of internal capacity to engage with capital markets.

Emergence of Muni Green Bonds

Despite these limitations, muni green bonds are gaining momentum. Out of a sample of 18 recent muni bond issuances worth INR 2,864 crore:

1. Four of the last seven muni bond issuances, amounting to INR 694 crore (~25 per cent of the subset) were green-labelled, indicating that muni green bond issuance is on the rise.
2. Eleven bonds worth INR 1,675 crore (~58 per cent the value of all the bonds) could have been potentially labelled green (green potential) based on the specified use of proceeds. However,  they were not, thus representing missed opportunities.
3. The potentially labelled green bonds were issued with coupons that had an average spread of 1.60 per cent sovereign yield, versus a much lower spread on the green-labelled ones, at ~1.11 per cent (by ~50 bps). This indicates that the labelling appears to be associated with a lower cost of borrowing. 
4. Spreads for non-green muni bonds (3 nos) at 2.28 per cent were found to be much higher than both green-labelled (by 117 bps) and potentially labelled green (67 bps). This indicates that even in the absence of labelling, the green end-use appears to be associated with a lower cost of borrowing.
5. Combining the findings from points 1 and 2 highlights that ~83 per cent of all bond proceeds in the subset were directed towards green end-use, whether labelled as such or not.
6. Applying this finding to conservative third-party estimates of the cumulative muni bond market potential by CARE Ratings and the World Bank, in general, suggests that the potential for muni green bonds is USD 2.5–6.9 billion, over different timelines in the next 5–10 years.

RISE Framework: A Four-Point Action Plan

To unlock the full potential of muni (and muni green) bonds, the report proposes a strategic framework—RISE, which stands for:

• Reform: Upgrade financial and accounting systems; diversify and strengthen own-revenue sources.
• Identify: Map infrastructure needs and assess borrowing/bond issuance potential.
• Strengthen: Build internal capabilities in financial management and sustainability-linked planning.
• Engage: Proactively collaborate with key stakeholders—regulators, DFIs, investors, credit agencies, and public institutions.

This roadmap is designed to empower ULBs, particularly Municipal Corporations, to mobilise long-term climate-aligned capital and become key actors in India's urban and climate transition.