The Union Cabinet approved the Urban Challenge Fund with Central Assistance of Rs one trillion (tn) to cover 25 per cent of project cost provided at least 50 per cent is mobilised from market sources. The measure is expected to mobilise Rs four tn in the urban sector over the next five years and signals a shift from grant based to market linked, reform driven infrastructure creation. The Fund will operate from FY 2025–26 to FY 2030–31 with an extendable implementation period to FY 2033–34.

The Fund aims to leverage market finance, private participation and citizen centric reforms to deliver resilient, productive, inclusive and climate responsive cities and to position urban areas as drivers of economic growth. It implements the Government vision set out in Budget 2025–26 on Cities as Growth Hubs, Creative Redevelopment and Water and Sanitation. Project verticals include integrated economic and transit planning, urban mobility, creative redevelopment and water and sanitation upgrades.

A minimum of 50 per cent of project financing must come from market sources such as municipal bonds, bank loans and public private partnerships, with the balance from States, Union Territories and Urban Local Bodies. Projects will be selected through a competitive challenge mode with funding linked to reforms, milestones and defined outcomes and a strong emphasis on governance, financial and operational reforms. A dedicated Rs 50 billion (bn) corpus will enhance the creditworthiness of 4,223 cities including Tier II and Tier III cities for first time market access.

A Credit Repayment Guarantee Scheme of Rs 50 bn will support first time market access for smaller ULBs and cities with a central guarantee of up to Rs 70 million (mn) or 70 per cent for first loans and Rs 70 mn or 50 per cent on successful repayment, effectively enabling projects of minimum Rs 200 mn for initial projects and Rs 280 mn thereafter. Paperless monitoring will be facilitated through a single digital portal and continuation of reforms will be a prerequisite for further releases.