THEBUSINESSBYTES BUREAU
NEW DELHI, FEBRUARY 14, 2026
In a landmark move aimed at reshaping India’s urban growth model, the
Union Cabinet chaired by Prime Minister Narendra Modi has approved the launch
of the Urban Challenge Fund (UCF) with a central assistance outlay of ₹1 lakh
crore. The initiative is designed to unlock a total investment of ₹4 lakh crore
in the urban sector over the next five years by shifting from grant-based
funding to a market-linked, reform-oriented and outcome-driven framework.
Under the new mechanism, central assistance will cover 25 per cent of
project costs, provided that at least 50 per cent of financing is mobilised
from market sources such as municipal bonds, bank loans and public–private
partnerships. The remaining share will be contributed by states, Union
Territories and urban local bodies. The Fund will operate from FY 2025–26 to FY
2030–31, with an implementation window extendable until FY 2033–34.
The Urban Challenge Fund aims to build resilient, productive and climate-responsive
cities while positioning urban centres as engines of economic growth. It seeks
to leverage private capital, strengthen urban governance and promote
citizen-centric reforms to deliver high-quality infrastructure. Projects will
be selected through a transparent challenge-based process that rewards
transformative impact, sustainability and reform commitments, with fund
releases tied to milestones and measurable outcomes.
A key component of the initiative is a ₹5,000 crore corpus to enhance the creditworthiness of 4,223 cities, including
Tier-II and Tier-III urban centres, enabling them to access market finance for
the first time. In addition, a dedicated Credit Repayment Guarantee Scheme
worth ₹5,000
crore will support smaller urban local bodies, particularly in Northeastern and hilly states. The scheme will
provide central guarantees of up to ₹7 crore or 70 per cent of the
loan amount for first-time borrowing, thereby facilitating projects of at least
₹20 crore and encouraging a pipeline of bankable urban investments.
The Fund will support three major verticals: developing cities as growth
hubs through integrated spatial and transit planning; creative redevelopment of
central business districts, heritage areas and brownfield sites with climate
resilience and decongestion measures; and comprehensive upgrades in water
supply, sewerage, stormwater systems and solid waste management to strengthen
urban sanitation and sustainability.
Coverage will extend to all cities with populations above 10 lakh, all
state and Union Territory capitals, and major industrial cities with
populations exceeding one lakh. Smaller urban local bodies will benefit through
the credit guarantee framework, ensuring that, in principle, the entire urban
ecosystem is brought within the reform-linked financing architecture.
Funding will be anchored to a broad reform agenda spanning digital governance, financial strengthening, operational efficiency, spatial planning and transit-oriented development. Projects will be monitored through a paperless digital portal of the Ministry of Housing and Urban Affairs, with third-party verification and clearly defined key performance indicators to ensure accountability and sustainable operation and maintenance.
By catalysing private investment, improving service delivery and fostering competitive urban reforms, the Urban Challenge Fund is expected to accelerate the creation of future-ready cities, generate employment, enhance inclusiveness and cleanliness, and align urban development with national economic and climate priorities.
