Urban Challenge Fund: ₹1 Lakh Crore Push for Growth-Driven and Climate-Ready Cities

The Union Cabinet has approved the launch of the ‘Urban Challenge Fund’ (UCF).

It gives effect to the government’s vision, announced in the Union Budget 2025-26, to implement proposals relating to ‘Cities as Growth Hubs’, ‘Creative Redevelopment of Cities’, and ‘Water and Sanitation’.

About Urban Challenge Fund

• It is a Centrally Sponsored Scheme of the Ministry of Housing and Urban Affairs, with a total Central assistance of ₹1 lakh crore.
• Financing Structure: A minimum of 50 per cent of project financing has to be mobilised from market sources, including municipal bonds, bank loans and Public–Private Partnerships (PPPs).
• The remaining share may be contributed by States, Union Territories (UTs), Urban Local Bodies (ULBs) or other sources.
• Coverage: The Fund will cover:
  • All cities with a population of 10 lakh or more (2025 estimates);
  • State and Union Territory capitals not covered above; and
  • Major industrial cities with a population of 1 lakh or more
  • Additionally, all ULBs in hilly States, North-Eastern States, and smaller ULBs with population below 1 lakh will be eligible for support under the Credit Repayment Guarantee Scheme.

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Salient Features

• Competitive Challenge Mode Selection: Projects will be selected through a transparent and competitive challenge mode, ensuring support to high-impact and reform-oriented proposals.
• Reform-Oriented Approach: There will be a strong thrust on reforms across Urban Governance, Market & Financial systems, Operational efficiency, and Urban Planning
• Promoting Private Sector Participation: Private sector participation will be encouraged through structured risk-sharing frameworks and benchmarking of service delivery standards
• Credit Enhancement Mechanism: A dedicated ₹5,000 crore corpus will enhance the creditworthiness of 4223 cities including Tier- II and Tier-III cities, particularly for first-time access to market finance.
• Making ULBs Bankable: It aims to position Urban Local Bodies (ULBs) as a credible and bankable asset class in the financial market
• Reform-Linked Funding Framework: Funding under the Urban Challenge Fund is anchored to a comprehensive reform agenda covering:
  • Governance and digital reforms;
  • Market and financial reforms to strengthen creditworthiness;
  • Operational reforms for improved service delivery and utility efficiency;
  • Urban planning and spatial reforms, including transit-oriented development and green infrastructure; and
  • Project-specific reforms with defined Key Performance Indicators (KPIs), third-party verification and sustainable Operation & Maintenance mechanisms.
• Project Verticals under Urban Challenge Fund:
  • Cities as Growth Hubs: It aims to identify key economic zones and city regions while promoting integrated planning, corridor-based development, improved urban mobility, and competitive infrastructure growth.
  • Creative Redevelopment of Cities: It focuses on revitalising business and heritage areas, regenerating brownfield sites, promoting Transit-Oriented Development, strengthening climate resilience, and reducing congestion, especially in Northeastern and hilly States.
  • Water and Sanitation: It aims to upgrade water supply, sewerage and stormwater systems, develop rurban infrastructure and water grids, strengthen solid waste management, and remediate legacy waste with a focus on Swachhata.

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Significance

• Building Future-Ready Cities: The fund aims to build resilient, productive, inclusive, and climate-responsive cities, positioning them as a key driver of the country’s next phase of economic growth.

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