Urban Challenge Fund:

The Union cabinet has approved schemes and infrastructure projects with a cumulative outlay of 1.6 trillion, including the Urban Challenge Fund for urban development and the 10,000 crore Startup India Fund of Funds 2.0.

The Urban Challenge Fund (UCF), approved by the Union Cabinet on February 13, 2026, represents a fundamental shift in India’s urban development strategy. Instead of traditional grant-based funding, it introduces a competitive, market-linked, and reform-driven model.

Core Features of the Urban Challenge Fund:

The fund is designed to catalyze 4 lakh crore in total investments over the next five years (FY26–FY31) by leveraging Central Assistance to attract private capital.

• Central Outlay: 1 lakh crore ($12 billion).

• Funding Formula (25:50:25): * 25%: Central Assistance (CA).

• 50% (Minimum): Must be raised by the city from market sources (Municipal Bonds, Bank Loans, or Public-Private Partnerships).
• 25%: Contributed by States, Union Territories, or Urban Local Bodies (ULBs).

• The “Challenge” Mode: Funding is not automatic. Cities must compete by submitting “bankable” project proposals. Selection is based on the project’s transformative impact, economic viability, and the city’s commitment to governance reforms.

 

Coverage and Focus Areas:

The UCF aims to transform specific urban categories into “Growth Hubs”:

Targeted Cities:

• Metros: All cities with a population of 10 lakh or more (as per 2025 estimates).
• Capitals: All State and Union Territory capitals.

• Industrial Centers: Major industrial cities with a population above 1 lakh.Three Major Project Verticals:

1. Cities as Growth Hubs: Focuses on transit-oriented development, integrated spatial planning, and “greenfield” (new) or “semi-greenfield” infrastructure.
2. Creative Redevelopment: Revitalizing heritage cores, brownfield regeneration, and de-congesting central business districts (especially in hilly and NE states).

3. Water and Sanitation: Upgrading water grids, sewerage, and integrated solid waste management (including legacy waste remediation).

Support for Smaller Cities (Credit Guarantee):

Recognizing that smaller towns may struggle to borrow from the market, the Cabinet approved a 5,000 crore Credit Repayment Guarantee Scheme.

• Eligibility: Cities in Northeastern and Hilly states, and towns with a population below 1 lakh.

• The Guarantee: The Centre provides a guarantee for first-time loans (up to 7 crore or 70% of the loan). This acts as a “safety net” for banks, encouraging them to lend to smaller, unrated municipalities.

Strategic Significance:

• Ending “Grant Dependency”: Forces cities to improve their financial health and credit ratings to access funds.
• Climate Resilience: Prioritizes projects that are climate-responsive and inclusive.

• Reform Linkage: Continuation of fund release is strictly tied to achieving milestones in digital governance, urban planning, and financial transparency.