The Union Cabinet approved the Urban Challenge Fund with central assistance of Rs one trillion (Rs one tn) to promote market-led urban transformation. Central assistance will cover 25 per cent of project cost, conditional on mobilisation of at least 50 per cent from market sources, yielding a projected total investment of Rs four trillion (Rs four tn) over five years. The Fund will operate from FY 2025–26 to FY 2030–31 with an extendable implementation period to FY 2033–34. The initiative signals a shift from grant-based to market-linked, reform-driven urban infrastructure financing.

The Fund will leverage market finance private participation and citizen-centric reforms to build resilient productive inclusive and climate-responsive cities. A dedicated Rs 50 billion (Rs 50 bn) corpus will enhance the creditworthiness of 4223 cities including Tier-II and Tier-III municipalities and facilitate first-time access to market finance. Positioning urban local bodies as a bankable asset class is a core objective.

Credit Repayment Guarantee Scheme of Rs 50 billion (Rs 50 bn) will support smaller cities and urban local bodies in Northeastern and hilly States and those with population below 100,000 in other States and UTs. The scheme provides a Central guarantee of up to Rs 70 million (Rs 70 mn) or 70 per cent of the loan for first-time borrowing and on successful repayment will offer Rs 70 million or 50 per cent for subsequent loans. This will back projects of a minimum Rs 200 million (Rs 200 mn) for first projects and Rs 280 million (Rs 280 mn) for subsequent projects. Projects will be selected through a challenge-based process linked to reforms milestones and verified outcomes.

Funding is anchored to reforms in governance market and financial systems operational efficiency and urban planning with paperless monitoring through a single digital portal. Coverage will include all cities with a population of one million (one mn), State and Union Territory capitals, and industrial cities with a population of 100,000 (0.1 mn) or more. The Fund is expected to catalyse private investment strengthen urban governance and accelerate the creation of future-ready cities.