February 14, New Delhi – The Union Cabinet, chaired by Prime Minister Narendra Modi, approved the launch of the Urban Challenge Fund (UCF) with a total Central Assistance (CA) of Rs. 1 lakh crore. The CA will cover 25% of the project cost, subject to raising a minimum of 50% of the project cost from the market. This is expected to lead to a total investment of Rs. 4 lakh crore in the urban sector over the next five years, marking a paradigm shift in India’s urban development approach from grant-based financing to market-linked, reform-driven, and outcome-oriented infrastructure creation.
Union Minister of Information and Broadcasting and Railways, Ashwini Vaishnaw, said that special focus will be on Tier 2, 3, and 4 cities, as well as the Northeast and hill regions.
The Urban Challenge Fund will leverage market finance, private participation, and citizen-centric reforms to deliver high-quality urban infrastructure. The fund aims to build resilient, productive, inclusive, and climate-responsive cities, positioning them as key drivers of India’s next phase of economic growth.
The fund will be operational from FY 2025–26 to FY 2030–31, with an extendable implementation period up to FY 2033–34. It will implement the Government’s vision announced in Budget 2025–26, covering Cities as Growth Hubs, Creative Redevelopment of Cities, and Water and Sanitation projects.
Key Features of the Urban Challenge Fund:
A minimum of 50% of project financing must be mobilized from market sources, including municipal bonds, bank loans, and Public–Private Partnerships (PPPs). The remaining share may come from States, Union Territories (UTs), Urban Local Bodies (ULBs), or other sources.
Projects will be selected through a transparent and competitive challenge mode to support high-impact, reform-oriented proposals.
Strong focus on reforms across Urban Governance, Market & Financial systems, Operational efficiency, and Urban Planning.
Private sector participation will be encouraged through structured risk-sharing frameworks and benchmarking of service delivery standards.
A dedicated Rs. 5,000 crore corpus will enhance the creditworthiness of 4,223 cities, including Tier-II and Tier-III cities, particularly for first-time access to market finance.
Positioning ULBs as a bankable asset class.
Credit Repayment Guarantee for Smaller Cities
To facilitate first-time access to market finance for cities/ULBs in Northeastern and hilly states and smaller ULBs (population <1,00,000) in other states/UTs, a Credit Repayment Guarantee Scheme of Rs. 5,000 crore has been approved. The scheme will provide a Central guarantee of up to Rs. 7 crore or 70% of the loan amount (whichever is lower) for first-time loans. Upon successful repayment of the first loan, a central guarantee of Rs. 7 crore or 50% of the loan amount (whichever is lower) will be provided. This will support projects of minimum Rs. 20 crore for first-time borrowers and Rs. 28 crore for subsequent projects in smaller cities.
Coverage:
All cities with a population of 10 lakh or more (2025 estimates).
All state and UT capitals not covered above.
Major industrial cities with a population of 1 lakh or more.
All ULBs in hilly states, Northeastern states, and smaller ULBs (<1 lakh population) will be eligible under the Credit Repayment Guarantee Scheme. In principle, all cities will be covered under UCF.
Reform-Linked Funding Framework:
Funding under the Urban Challenge Fund will be anchored to a comprehensive reform agenda, covering:
Governance and digital reforms
Market and financial reforms to strengthen creditworthiness
Operational reforms for improved service delivery and utility efficiency
Urban planning and spatial reforms, including transit-oriented development and green infrastructure
Project-specific reforms with defined KPIs, third-party verification, and sustainable operation & maintenance mechanisms
