Cabinet Approves ₹1 Lakh Crore Urban Challenge Fund to Boost Market‑Led City Development

The Union Cabinet has approved the launch of the Urban Challenge Fund, a ₹1 lakh crore programme aimed at transforming urban infrastructure through a market‑driven and reform‑oriented approach. The scheme will operate from FY26 to FY31, with an optional extension until FY34 for project completion.

It marks a major shift from grants to a model that rewards cities based on reforms, financial discipline and measurable outcomes. The new framework aligns with Budget 2025–26 initiatives focused on Cities as Growth Hubs, Creative Redevelopment and Water & Sanitation improvements.

Cabinet Clears Reform-Based Urban Challenge Fund Framework

The approved Urban Challenge Fund is designed to incentivise cities to mobilise market financing for infrastructure projects. Under the scheme, the central government will provide 25% assistance for each approved project.

Cities must raise at least 50% of the project cost through market instruments such as municipal bonds, bank borrowings or public–private partnerships. This structure aims to embed financial discipline in Urban Local Bodies and reduce dependence on traditional grants.

Funding Structure to Unlock Larger Urban Investments

According to the framework, the ₹1 lakh crore central allocation is expected to catalyse nearly ₹4 lakh crore in total investments between FY26 and FY31. This multiplier effect arises from the requirement that cities secure significant co‑financing before receiving central support.

Funding will be linked to clearly defined milestones, ensuring that disbursements occur only against measurable progress. The competitive challenge mode is expected to prioritise proposals with strong planning, transparent financial structures and robust governance mechanisms.

Reform Agenda Anchored to Governance, Planning and KPIs

A strong reform thrust has been incorporated into the Urban Challenge Fund to strengthen city-level governance. Key areas include digitisation of administrative processes, improved financial reporting, enhanced operational efficiencies and reforms in urban planning systems.

Cities will be required to meet defined Key Performance Indicators that will be verified through independent third‑party assessments. These requirements aim to position Urban Local Bodies as credible and bankable institutions capable of independently accessing market finance.

Credit Repayment Guarantee Scheme to Support Smaller Cities

To help urban bodies secure market financing for the first time, the Cabinet has also approved a ₹5,000 crore Credit Repayment Guarantee Scheme. The scheme targets 4,223 urban centres, including Tier‑II and Tier‑III cities.

Urban Local Bodies with populations below 1 lakh and those in northeastern or hilly states will receive a central guarantee of up to ₹7 crore or 70% of the loan amount, whichever is lower, for first‑time borrowing. For subsequent projects, the guarantee cover will be up to ₹7 crore or 50% of the loan amount.

Read More: India Emerges as a Top Driver of Global Urban Growth.

Conclusion

The Cabinet’s approval of the Urban Challenge Fund marks a significant shift towards a market‑linked urban development strategy. The scheme’s focus on co‑financing, reforms and measurable outcomes aims to strengthen institutional capacity in cities.

The accompanying Credit Repayment Guarantee Scheme provides critical support for smaller urban bodies seeking to enter credit markets. Together, these initiatives are expected to reshape urban infrastructure financing and governance over FY26–FY31.

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