The Union Cabinet, chaired by Prime Minister Narendra Modi, on Thursday approved the launch of the Urban Challenge Fund (UCF) with a total Central Assistance (CA) of Rs 1 trillion to drive market-led urban transformation.
CA will cover 25 per cent of the project cost, subject to raising a minimum of 50 per cent of the project cost from the market.
This will lead to a total investment of Rs 4 trillion in the urban sector in the next five years, marking a shift in India’s urban development approach from grant-based financing to market-linked, reform-driven and outcome-oriented infrastructure creation.
UCF will leverage market finance, private participation and citizen-centric reforms for the delivery of high-quality urban infrastructure. The fund aims to build resilient, productive, inclusive and climate-responsive cities, positioning them as key drivers of the country’s next phase of economic growth, a Cabinet statement issued on Saturday noted.
The fund will be operational from fiscal year (FY) 2026 to FY31, with an extendable implementation period up to FY34. “It gives effect to the government’s vision announced in the Budget 2025–26 to implement proposals relating to cities as growth hubs, creative redevelopment of cities, and water and sanitation.”
A minimum of 50 per cent of project financing has to be mobilised from market sources, including municipal bonds, bank loans and public–private partnerships (PPPs). The remaining share may be contributed by states, Union Territories (UTs), Urban Local Bodies (ULBs) or other sources.
Projects will be selected through a transparent and competitive challenge mode, ensuring support for high-impact and reform-oriented proposals. There will be a strong thrust on reforms across urban governance, market and 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 is expected to 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.
The Centre has also approved a Rs 5,000 crore credit repayment guarantee scheme to help smaller cities and ULBs, especially in the Northeast and hilly states, access market finance for the first time. The scheme will provide a central guarantee of up to Rs 7 crore or 70 per cent of the first loan (whichever is lower), and 50 per cent for subsequent loans, supporting projects of at least Rs 20 crore initially and Rs 28 crore thereafter.
Under the fund, projects will be selected through a challenge-based framework focused on transformative impact, sustainability and reforms. Funding will be milestone-linked, with continued reforms mandatory for further releases, and monitored via a single digital portal.
Key project areas include developing cities as growth hubs, urban redevelopment and climate resilience, and water and sanitation upgrades. The fund will cover cities with over 10 lakh population, all state and UT capitals, major industrial cities, and smaller ULBs through the guarantee scheme.
Funding is tied to governance, financial, operational and urban planning reforms, with defined key performance indicators and third-party verification. The initiative aims to catalyse private investment, strengthen urban governance and accelerate future-ready urban development.
