Centre launches Rs 1 lakh crore Urban Challenge Fund to drive city redevelopment

New Delhi: Aimed at redevelopment of the cities, the Centre has approved the launch of the Urban Challenge Fund (UCF) with a total central assistance of Rs 1 lakh crore.

The Union Cabinet chaired by Prime Minister Narendra Modi on Friday took the decision to create the UCF with the focus on creative redevelopment of cities, improving urban mobility, strengthening water and sanitation systems, Union Minister for Information and Broadcasting Ashwini Vaishnaw told media persons here on Saturday.

This was one of the major decisions taken in the last cabinet meeting held in the Prime Minister's Office (PMO) from the imperial South Block on Raisina Hill on Friday. Following this cabinet meeting, the PMO was shifted to newly-constructed Seva Teerth.

The UCF aims to drive market-led, reform-driven urban transformation by focusing on creative redevelopment of cities, improving urban mobility, strengthening water and sanitation systems, and building resilient, inclusive, and climate-responsive cities.

It gives effect to proposals announced in the Union Budget 2025-26, including "Cities as Growth Hubs," creative redevelopment, and enhancements in water and sanitation infrastructure.

Under the scheme, central assistance will cover up to 25% of the project cost, provided at least 50% of the funding is mobilised from market sources such as municipal bonds, bank loans, or public-private partnerships. The remaining 25% will come from states, Union Territories, urban local bodies (ULBs), or additional market borrowings.

With the Centre's Rs 1 lakh crore contribution, the initiative is expected to unlock more than Rs 4 lakh crore in total investment for urban areas over the next five years (some sources indicate around Rs 3-4 lakh crore, depending on leverage).

Projects will be selected through a competitive "challenge-mode" mechanism, based on readiness, bankability, and clear outcome indicators. Funding is linked to reforms in urban governance, municipal finance, digital services, project monitoring, and integrated land use-mobility planning.

Eligible cities include - All state and Union Territory capitals, cities with a population of 10 lakh or more, major industrial cities with 1 lakh or more population, special focus on Tier-II and Tier-III cities, as well as those in the Northeast and hilly states.

However, projects already funded under schemes such as AMRUT 2.0 or Swachh Bharat Mission 2.0 will not be eligible. The UCF will synergise with the Smart Cities Mission, which is nearing completion.

Key project areas include - Infrastructure retrofitting and creative redevelopment. Improvement of urban mobility, rejuvenation of central business districts and heritage cores, development of greenfield and semi-greenfield areas, upgradation of water supply and sanitation and focus on cleanliness and solid waste management,

The fund will be operational from FY 2025-26 to FY 2030-31, with an extendable implementation period up to FY 2033-34.

To support smaller cities, especially in the Northeast and hilly regions, and those accessing market finance for the first time, the Cabinet also approved a Rs 5,000 crore credit repayment guarantee corpus. For initial loans, the Union government will guarantee up to Rs 7 crore or 70% of the loan amount (whichever is lower), enabling projects of around Rs 20 crore initially and up to Rs 28 crore in subsequent rounds.

Administrative control of projects will remain with state governments and ULBs, ensuring municipal bodies retain responsibility. Technology providers and industry players will participate in execution.

Vaishnaw emphasised that extensive consultations with states were held over the past year to finalise the framework, highlighting the important role of states in implementation. The scheme places citizens at the centre, aiming to improve urban governance through new reforms while leveraging private sector participation and market financing for high-quality, sustainable urban infrastructure.