New Delhi, Feb 14 (.) The union Cabinet has approved the launch of the Urban Challenge Fund (UCF) with a total Central Assistance (CA) of Rs 1 lakh crore, marking what the government described as a paradigm shift in India’s urban development strategy.
Briefing reporters on Saturday about decisions taken at Friday’s Cabinet meeting, union Minister for Information and Broadcasting Ashwini Vaishnaw said the new fund would transform the way cities are financed and developed.
“The Urban Challenge Fund will move urban development from a grant-based model to a market-linked, reform-driven and outcome-oriented approach. With Rs 1 lakh crore in Central Assistance and mandatory market mobilization, this initiative will lead to a total investment of about Rs 4 lakh crore in the urban sector over the next five years,” Vaishnaw said.
Under the framework, the Centre will provide up to 25% of project costs as assistance, provided that at least 50% of the funding is raised through market sources such as municipal bonds, bank loans and Public–Private Partnerships (PPPs). The remaining share can be contributed by states, union Territories and Urban Local Bodies (ULBs).
The Fund will be operational from FY 2025–26 to FY 2030–31, with an extendable implementation period up to FY 2033–34. It implements the government’s Budget 2025–26 vision covering “Cities as Growth Hubs,” “Creative Redevelopment of Cities,” and “Water and Sanitation.”
Projects will be selected through a transparent challenge-based mechanism, with funding tied to reforms, milestones and clearly defined outcomes. Continuation of reforms will be mandatory for subsequent fund releases. Monitoring will be conducted through a unified digital portal of the Ministry of Housing and Urban Affairs.
A dedicated Rs 5,000 crore corpus has been approved to enhance the creditworthiness of 4,223 cities, including Tier-II and Tier-III cities, positioning ULBs as a “bankable asset class.”
In addition, a Rs 5,000 crore Credit Repayment Guarantee Scheme will support first-time market borrowing by cities in Northeastern and hilly states, as well as smaller ULBs (population below one lakh) elsewhere.
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, a second guarantee of up to Rs 7 crore or 50% of the loan amount will be available for subsequent borrowing.
“This will enable smaller cities to access institutional finance for the first time and undertake projects of at least Rs 20 crore initially, and Rs 28 crore for subsequent projects,” Vaishnaw said.
The UCF will support projects across three broad pillars: Cities as Growth Hubs: Integrated spatial and economic planning, transit-oriented development, greenfield and semi-greenfield expansion, and urban mobility projects. Creative Redevelopment: Renewal of central business districts, brownfield regeneration, heritage core revitalization, climate resilience and disaster mitigation. Water and Sanitation: Upgradation of water supply, sewerage and stormwater systems, integrated solid waste management and legacy waste remediation.
The funding framework is anchored to reforms in governance and digitization, financial and credit strengthening, operational efficiency of utilities, and urban planning practices. Projects will be evaluated on transformative economic, social and climate outcomes, including private investment mobilization, job creation, inclusiveness and improved service delivery.
The Fund will cover all cities with a population of 10 lakh or more (as per 2025 estimates), all state and union Territory capitals not already included, and major industrial cities with populations exceeding one lakh.
Officials said the initiative is expected to catalyse large-scale private investment, strengthen urban governance and accelerate the development of climate-responsive and economically competitive cities.
“The Urban Challenge Fund will position India’s cities as key drivers of the country’s next phase of economic growth,” Vaishnaw said.
. SKA .