Cabinet Clears Rs 1 Lakh Cr Urban Challenge Fund; Market-Linked Financing Key Focus

New Delhi, Feb 16 (KNN) The Union Cabinet, chaired by Prime Minister Narendra Modi, has approved the launch of the Urban Challenge Fund (UCF) with a total Central Assistance of Rs 1 lakh crore.

The Centre’s assistance will cover 25 per cent of project costs, subject to at least 50 per cent of the funding being raised fr0m market sources. The remaining share will be contributed by States, Union Territories and Urban Local Bodies (ULBs). 

The framework is expected to mobilise approximately Rs 4 lakh crore in urban investment over the next five years.

Shift to Market-Linked Urban Financing

The Fund signals a move away fr0m grant-based urban financing towards a market-linked and reform-oriented model. It will operate fr0m FY 2025–26 to FY 2030–31, with implementation extendable up to FY 2033–34. 

The initiative aligns with announcements made in Budget 2025–26 relating to Cities as Growth Hubs, Creative Redevelopment and Water and Sanitation.

Projects will be selected through a competitive process, with funding tied to defined milestones and reform implementation. Monitoring will be conducted through a single digital portal of the Ministry of Housing and Urban Affairs.

At least half of the project financing must be mobilised fr0m sources such as municipal bonds, bank loans and public–private partnerships.

Credit Support for Smaller Cities

To strengthen access to market finance, a Rs 5,000 crore corpus has been approved to enhance the creditworthiness of 4,223 cities, including Tier-II and Tier-III centres.

In addition, a Rs 5,000 crore Credit Repayment Guarantee Scheme will support market borrowing in Northeastern and hilly states as well as smaller ULBs. 

A Central guarantee of up to Rs 7 crore or 70 per cent of the loan amount (whichever is lower) will be provided for first-time borrowing, with reduced coverage for subsequent loans.

Project Focus and Coverage

Projects under the Fund will be organised into three verticals — Cities as Growth Hubs, Creative Redevelopment of Cities, and Water and Sanitation. The focus will include infrastructure development, climate resilience, urban renewal and essential services.

Coverage will extend to cities with populations above 10 lakh, all State and Union Territory capitals, and major industrial cities with populations above 1 lakh.

According to the government, projects will be evaluated on economic, social and climate outcomes, including revenue generation, private investment, job creation and service delivery standards. Third-party verification and sustainable maintenance mechanisms will be integral to the framework.

(KNN Bureau)