Competition and innovation will drive urban development, ₹1 lakh crore fund approved

Union Cabinet has approved the launch of the Urban Challenge Fund (UCF) to give a new direction to urban development in the country. This ambitious initiative will provide a total central support of ₹1 lakh crore, aimed at accelerating market-based urban transformation. This move is considered significant in light of rapid urbanization, rising demand for infrastructure, and the development of cities as engines of economic growth.

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¨     The UCF aims to mobilise a total of ₹4 lakh crore for urban development between FY 2025–26 and FY 2030–31.

¨     The funding involves 25% Central Assistance of One lakh crore, a minimum of 50% of the project cost from market sources, and the remaining amount from States/ULBs.

¨     The announcement of the Fund marks a paradigm shift in India’s urban development approach from grant- based financing to market-linked, reform-driven and outcome-oriented infrastructure creation.

¨     It will leverage market finance, private participation and citizen- centric reforms for the delivery of high-quality urban infrastructure.

¨     It gives effect to the Government’s vision announced in Budget 2025–26 to implement proposals relating to Cities as Growth Hubs, Creative Redevelopment of Cities, and Water and Sanitation.

Urban Challenge Fund (UCF)

¨     UCF is a new Centrally Sponsored Scheme of the Ministry of Housing and Urban Affairs (MoHUA) for FY 2025-26 to FY 2030-31, extendable by 3 years, to support transformative and bankable urban projects through a competitive “challenge-mode”.

¨     The Fund will cover: All cities with a population of 10 lakh or more (2025 estimates); All State and Union Territory capitals not covered already; and Major industrial cities with a population of 1 lakh or more.

¨     Additionally, all ULBs in hilly States, North-Eastern States, and smaller ULBs with a population below 1 lakh will be eligible for support under the Credit Repayment Guarantee Scheme.

Under UCF, cities will be supported to do projects under three verticals

¨     Creative Redevelopment of Cities: Focuses on revitalising congested central business districts (CBDs) and historic cores, upgrading legacy infrastructure, improving public spaces, mobility, flood resilience, and enabling land value capture to make redevelopment viable.

¨     Cities as Growth Hubs: Strengthens city regions as economic engines by connecting economic nodes and improving competitiveness infrastructure.

¨     Water & Sanitation: Tackles legacy gaps and vulnerable areas and moves cities toward service saturation with sustainability and reuse/circularity.

¨     In order to facilitate first-time access to market finance for all Cities/ULBs in Northeastern & Hilly States and smaller ULBs (<1,00,000 population) in other States/UTs, a Credit Repayment Guarantee Scheme of ₹5,000 crore has been approved.

¨     The scheme will provide a Central guarantee of up to ₹7 crore or 70 per cent of the loan amount (whichever is lower) for first-time loans. On successful repayment of the first loan, a central guarantee of ₹7 crore or 50 per cent of the loan amount (whichever is lower) will be provided.

¨     Projects under the Fund will be selected through a challenge-based framework, including transformative impact, sustainability & reform orientation. Funding will be linked to reforms, milestones and clearly defined outcomes.

¨     Projects already funded under the Atal Mission for Rejuvenation and Urban Transformation 2.0 (AMRUT 2.0), the Swachh Bharat Mission-Urban 2.0 (SBM 2.0), or other Centrally Sponsored Schemes (CSS) are not eligible for assistance under the Urban Challenge Fund (UCF).

Salient Features of the Fund

¨     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 to high-impact and reform-oriented proposals.

¨     There will be a strong thrust 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 ₹5,000 crore corpus will enhance the creditworthiness of 4223 cities, including Tier- II and Tier-III cities, particularly for first-time access to market finance.

¨     Positioning Urban Local Bodies (ULBs) as Bankable Asset Class.