The Centre has approved setting up of a pooled finance development fund to enable urban local bodies to access capital and financial markets for investment in municipal infrastructure.

The move aims to enable development of a municipal bond market, sources in the Union urban development ministry said. Another key feature of the scheme, they said, is to faciliate development of bankable urban infrastructure projects through appropriate capacity-building measures and of financial structuring of plans.

Each state will be required to set up a state pooled finance entity in order to execute the Centre's pooled finance mechanism, the sources said.

Such entities will enable ULBs to enter the bond market on a regular basis and could also hedge risks against much large spectrum of activities than individual urban local bodies.

The Centre, ministry sources said, will support such entities through the PFDF.

Of the funds available for the PFDF, five per cent is proposed to be utilized for project development assistance and the balance 95 per cent for a special fund aimed at jacking up credit ratings of municipal bonds to investment grade, the sources said.

A tentative allocation of Rs 400 crore (Rs 4 billion) under the 10th Five-year Plan has been made for the scheme that is designed to reduce the cost of borrowing to local bodies through credit enhancement measures and through restructuring of existing costly debts, the sources added.