Market-Led Financing Model
Under the Urban Challenge Fund, Central Assistance will cover up to 25 percent of the project cost. However, states and urban local bodies must raise at least 50 percent of the financing from market sources such as municipal bonds, bank loans or Public–Private Partnerships (PPPs).
The remaining funds can be contributed by states, Union Territories, Urban Local Bodies (ULBs) or other approved sources. This structure is designed to encourage financial discipline while attracting large-scale private investment into urban infrastructure.
Focus on Reform and Accountability
Projects will be selected through a transparent challenge-based mechanism. Cities will compete by submitting reform-oriented and high-impact proposals. Funding will be directly linked to milestones, measurable outcomes and sustained implementation of reforms.
The reform agenda spans governance digitisation, financial strengthening of ULBs, improved operational efficiency and modern urban planning practices such as transit-oriented development and green infrastructure.
Three Key Project Verticals
The Urban Challenge Fund will support projects across three major verticals. The first, “Cities as Growth Hubs,” focuses on integrated spatial and economic planning, development along transit corridors, greenfield and semi-greenfield projects, and critical urban mobility infrastructure.
The second vertical, “Creative Redevelopment of Cities,” targets renewal of central business districts, heritage zones, brownfield regeneration and climate-resilient infrastructure. Special attention will be given to decongestion measures and development in northeastern and hilly states.
The third vertical centres on “Water and Sanitation,” covering water supply upgrades, sewerage systems, stormwater management, integrated solid waste management and remediation of legacy waste. Cleanliness and sustainability remain core priorities.
Boosting Creditworthiness of Cities
A dedicated ₹5,000 crore corpus has been created to strengthen the credit profile of nearly 4,223 cities, particularly Tier-II and Tier-III urban centres. This initiative aims to position ULBs as a viable and bankable asset class in financial markets.
Additionally, a Credit Repayment Guarantee Scheme of ₹5,000 crore has been approved to help smaller cities and those in northeastern and hilly states access market loans for the first time.
The scheme will provide a central guarantee of up to ₹7 crore or 70 percent of the loan amount, whichever is lower, for first-time loans. For subsequent loans, the guarantee will cover up to ₹7 crore or 50 percent of the loan amount, subject to conditions. This mechanism is expected to support projects worth at least ₹20 crore initially and ₹28 crore in subsequent phases.
Wide Coverage Across India
The Fund will cover all cities with populations exceeding 10 lakh, all state and Union Territory capitals not already included, and major industrial cities with populations above one lakh.
Smaller ULBs, particularly in hilly and northeastern states, will benefit through the guarantee scheme. In principle, all cities will be eligible under the broader Urban Challenge Fund framework.
Driving Future-Ready Urban Growth
The Urban Challenge Fund is expected to catalyse large-scale private investment, generate employment, improve urban services and enhance climate resilience. By tying funding to reforms and measurable outcomes, the government aims to build productive, inclusive and competitive cities that can serve as engines of economic growth.
With India’s urban population projected to expand rapidly in the coming decades, the Cabinet’s approval signals a decisive push towards sustainable and financially robust urban transformation.
