Pooled Finance Development Fund Scheme is launched by PFDF for offering credit facilities to the Urban Local Bodies in India. It helps the smaller municipalities get funds from alternative sources for development and infrastructure projects.
The Ministry of Urban Development introduced the Pooled Finance Development Fund (PFDF) Scheme in 2006 to extend credit facilities to Urban Local Bodies (ULBs) in the country.
Objectives of Pooled Finance Development Fund Scheme
The Pooled Finance Development Fund Scheme is aimed at helping smaller municipalities receive funds from alternative sources towards development of infrastructure projects. Under the scheme, ULBs can access enhanced credit facilities in the market on the basis of their creditworthiness. Some of the objectives of the scheme are as follows:
- Boost the growth of municipal bond market
- Decrease the borrowing costs to ULBs courtesy various credit enhancement measures in addition to restructuring of debts
- Increase access of ULBs to financial and capital markets by credit enhancement to State Pooled Finance Entities (SPFEs)
- Boost development of urban infrastructure courtesy efficient financial structuring of various projects.
What’s State Pooled Finance Entity?
To achieve proper implementation of the Pooled Finance Development Scheme (PFDF), a State Pooled Finance Entity (SPFE) has to be established in all states. The centre extends support to SPFE via the Pooled Finance Development Fund. Around 5% funds for PFDF will be used for project development while the remaining 95% should be used for Credit Rating Enhancement Fund (CREF) to boost the ratings of municipal bonds. The cost of development of a project for each ULB has to be analyzed (75% will be reimbursed by the centre and 25% by union territory/state governments). It is important to note that the central government will contribute 10% of the proposed bond issue or 50% of CREF, whichever is less. The accounts of Credit Rating Enhancement Fund are managed by the State Pooled Finance Entity. The CREF funds are invested in bonds of various financial institutions rated AAA or Government of India bonds. It is important to note that the bonds issued as per the pooled finance development scheme are tax-free. All the same, the dividend income and interest earned from CREF is not tax exempt.
What are the objectives of State Pooled Finance Entities?
The State Pooled Finance entities have the following objectives
- Buy bonds of Urban Local bodies
- Responsible for the management of Credit Rating Enhancement Fund (CREF)
- Decrease the borrowing costs to local bodies courtesy various credit enhancement measures and debt restructuring
- Boost the growth and development of various projects on bankable urban infrastructure
- Pave way for greater access of Urban Local Bodies to financial and capital markets aimed at improving critical municipal infrastructure
- Collaborate with Urban Local bodies for successful implementation of urban infrastructure projects
- Pick the desired projects on the basis of viability analysis
- Plan and mobilise the required resources by issuing bonds for investment in various projects
- Work towards getting appraisal for projects from credit rating agencies for planning large investment
- Draw up various projects which are technically sound apart from being in line with relevant environmental regulations
- Sign agreements with Urban Local Bodies and the central government