Return
to Story Page
To print: Select File and then Print from your
browser's menu
Our Banking Bureau
Mumbai, Sept 21: A methodology for credit rating of municipal entities has been prepared by Crisil after an in-depth study of such entities in India and abroad. This was used by Crisil to award a rating to the first municipal bond in the country floated by the Ahmedabad Municipal Corporation. This was followed by the Vijayawada Municipal Corporation and the Bangalore Municipal Corporation. Crisil's rating criteria for municipal entities involves an assessment of six factors.
1) Legal & Administrative Framework:
Crisil's analysis of the legal and administrative framework is based on the relevant Act, which defines all legal, structural and administrative elements for a municipal entity. The Act also outlines the obligatory and discretionary services to be extended by a municipal entity. The key features defined in the Act that are evaluated by Crisil are:
A) Municipal functional domain -- Crisil evaluates the obligatory and discretionary services which have been extended by the municipal entity todetermine the extent of its operational responsibilities and the constraints imposed therein.
B) Tax powers allocated to the municipal entity -- Crisil evaluates the taxing powers allocated to the municipal entity in relation to its functional domain and the tax effort of the municipal entity in terms of utilisation of all sanctioned tax options.
C) Election of municipal authorities and decision making process -- Crisil studies the constitution of the corporation, the elections to the standing and working committees, the term of office etc., as also the decision making process of the municipal entity.
D) State government municipal linkages -- The Act would specify the revenues that the municipal entity would receive by way of loans, grants or transfers from the state government.
E) Tax rates levied by the municipal entity and the basis of assessment -- Crisil studies the tax rates prescribed in the Act, the minimum and maximum tax rates and specific user charges which can be levied by the municipalentity. This is a key input in assessing the level of flexibility and autonomy.
F) Borrowing powers and the administrative requirements for mobilising funds from the capital markets are specified in the Act -- Crisil assesses the flexibility with the municipal entity to raise funds for projects.
2) Economic base of service area:
The economic base of the service area is analysed by Crisil with the objective of assessing the revenue generating potential of the municipal entity. Some of the indicators that are examined include:
1. The population base and its growth rate, 2. The level of industrial activity, 3. The level of commercial activity, 4. Diversity and elasticity of tax base, 5. Prospects of widening tax base, 6. Per capita income levels, 7. Number of vehicles registered with the regional transport office, 8. Pending telephone connections with DoT, 9. Growth in bank deposits raised by major public sector banks
3) Municipal Finances:
Municipal accounting systems prevailing in the countrytoday are based on the cash based system of accounting and are presented in the revenue capital account format. The receipts and expenditure for the past five years are assessed separately. In addition, the debt-profile of the municipal entity and the accounting policy followed by it are considered as key inputs in the analysis.
A) Overall surplus/deficit -- In its first stage of analysis, Crisil assesses the overall surplus/ deficit incurred by the entity. An assessment is also done of the contributors to the surplus position which is an increase in revenues or the control exercised over expenditure or a mix of both factors. A similar exercise is done in case of an overall deficit position.
B) Revenue receipts -- The revenue receipts are broadly classified into tax and nn-tax revenues. In the absence of cost recovery for most of the services provided by the municipal entity, the quantum and proportion of tax revenues assume importance in assessing financial autonomy.
C) Revenue expenditure -- Crisilcarries out an activity-wise and head-wise assessment of the revenue expenditure incurred by the municipal entity. The activity-wise analysis considers the proportionate allocations made for provision of core services.
D) Capital Account -- Criil assesses the level and stability of a municipal entity's capital receipts, as also its judicial deployment towards capacity building. Crisil views negatively, forced capital surpluses, arising out of cutbacks in capital expenditure in order to fund revenue deficits.
E) Debt profile -- Crisil assesses the debt profile of the municipal entity with reference to the source, tenure, interest rates and repayment arrangements for all major loans raised by the municipal entity.
4) Existing operations of the municipal entity:
Crisil acquires an understanding of the existing operations of the municipal entity through a study of the range of services provided by the entity and a comparison of the obligatory and discretionary services as defined in the relevant Act. Thekey parameters considered for this analysis are budgeted and actual outlays, major projects undertaken, track record of project management, extent of service augmentation and comparison with recommended norms.
5) Managerial assessment of municipal entity:
It has been Crisil's experience with municipal bond ratings that the financial health of the corporation is to a certain extent linked to the initiatives taken by the management to enhance the resource base and improve the level of municipal services.
6) Project specific issues:
With respect to any project being undertaken by the corporation for which funds are being raised, Crisil would assess the existing level of service, the improvements envisaged through the project, the project cost, means of funding the project and the effect of debt funding on the debt service coverage of the municipal entity.
7) Credit enhancements:
Crisil has also developed criteria for rating specific structured debt obligations (SDOs). SDOs are debt instrumentssecured by the cash flows from a specific asset or a source of revenues. The cash flows from the source are segregated from the issuer's other revenues and are the primary consideration for servicing the obligations towards the debt holders.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
------------------------------------------------------------
This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
------------------------------------------------------------