Plan To Dress Up Tier 2, 3 Cities Hit As Urban Local Bodies Falter Amid Cash Crunch

The Centre is now all set to invest ₹1 lakh crore in urban infrastructure over the next five years. As many as 33 projects in eight states have already been approved under its flagship Urban Challenge Fund (UCF) initiative, which was announced in the budget last year.

On paper, this seems to be a winning idea.

But then where is the challenge?

Challenges In Accessing UCF

The biggest hurdle is the weak financial health of urban local bodies (ULBs). This has made the UCF rollout a tall exercise. Poor revenue generation, high dependence on grants, lack of bankable projects, among others, have severely impacted the ULBs.

According to the data provided by the Ministry of Housing and Urban Affairs in the Lok Sabha last month, 162 out of 468 cities have received Investible Grade Rating (IGR). This implies that less than half have a rating which reflects a healthy financial status and that there is low default risk.

Assessment by private firms such as Munify Datatech, a municipal financing platform to connect creditworthy cities and bankable urban projects with lenders and development partners, shows that there are just around 100 investment-worthy cities in the country. Subalakshmi K, founder of Munify Datatech and urban finance expert, said, “There is a mental block in the market when it comes to municipal corporations due to their poor financial management and inability to pay vendors and even employees on time.”

Fiscal indiscipline, limited institutional capacity, and delayed project execution have reduced cities' ability to attract private financing, according to Urban economist Astha Agarwalla, associate professor at CEPT University.

“The corporations, which are heavily dependent on grants from the centre and states, don’t have a pipeline of bankable projects which will generate revenue. The other issue is timely realisation of the project, which often gets delayed due to land acquisition or administrative reasons,” she said.

A Centre for Public Policy and Research report on Urban Challenge Fund, authored by urban finance expert Ravikant Joshi, points to the financial constraints faced by corporations in opting for PPPs or raising funds through bonds and loans.

“In earlier schemes, ULBs were required to put in 25% to 30% of the project cost, but very few could actually do it. Under UCF, like Smart Cities Mission, ULBs are required to put in 25% from their own funds, which most of the ULBs will not be able to do it. Though the idea is to develop infrastructure in tier 2 and 3 cities, chances are that very few cities will benefit from it as not many cities will be able to raise 75% of the project cost just to access 25% of the centre’s fund,” Joshi said.

How UCFs Work

States such as Madhya Pradesh, Karnataka, Odisha, Telangana, Meghalaya, Maharashtra, Andhra Pradesh and Gujarat have got approval for projects ranging from integrated development of temples to upgradation of sewerage and water pipeline systems.

Unlike previous central government schemes, under UCF, implementing agencies will have to raise a substantial share of project funding from the market and also pay from their own coffers. The first-of-its-kind initiative marks a shift in the government’s approach to urban development—from traditional grant-based funding to market-led financing for urban infrastructure in cities.

Under UCF, the Centre will finance up to 25% of the project cost, provided at least 50% is funded from bonds, bank loans and Public Private Partnerships. The centre has also provided for Credit Repayment Guarantee Sub-Scheme (CRGSS), a part of UCF, to provide guarantee coverage for term loan assistance to ULB/cities in hill states and small cities with less than one lakh population.

To support this initiative, the Asian Development Bank (ADB) recently approved a US$1 billion loan for urban reforms. In June, the Securities and Exchange Board of India (SEBI) announced comprehensive reforms to strengthen the municipal bond market.

The change in the Centre’s funding pattern, urban finance experts say, might exclude several ULBs in tier 2 and 3 cities which are not financially strong.

Janaagraha, a Bengaluru-based think tank, assessed the market readiness of 191 municipal corporations for FY 2022-23 on its Cityfinance portal based on their revenue generation, expenditure composition, liquidity, and debt management.

“Around 43% of municipal corporations were found to be not market-ready as per the data of FY 2022-23 from cityfinance.in,” said Tushar Chakrabarty, Associate Manage -Public Finance Management at Janaagraha.

In the past, very few ULBs have accessed the market. According to SEBI, 22 municipal corporations have accessed the capital market and raised ₹4,540.34 crores through 31 issuances of municipal debt securities till March 31, 2026.

Cities Plan For Temple Redevelopment To Drainage Upgradation

Despite these constraints, states have begun identifying financially strong municipal corporations or projects where loan from banks or infrastructure financing institutions are available to pilot the new funding model.

In Madhya Pradesh, six projects have been approved in four cities. Ahead of the Simhastha Kumbh in 2028, the Ujjain Development Authority (UDA) has proposed a ₹1,124 crore plan for integrated development of 11 temples around the Mahakal Lok corridor. For this, the UDA aims to raise close to ₹200 crore through a temple bond — a first-of-its-kind municipal bond.

After the tragic death of several people due to consumption of contaminated water in Indore’s Bhagirathpura area, the Indore Municipal Corporation has planned projects to fix the water supply system and sewerage system. It has got ₹907.74 crore water supply system upgradation project approved under UCF, said a senior Madhya Pradesh government official. The corporation plans to raise around ₹680 crore through bank loans. It has also proposed a ₹306 crore project for sewerage upgradation.

While states are assisting small cities in preparing a list of bankable projects, they are initially focusing on cities which have good credit ratings. For instance, the Uttar Pradesh government has been working on projects from 17 municipal corporations of big cities. “We have taken up 17 municipal corporations such as Lucknow, Meerut, Kanpur and Ghaziabad in the first round to propose projects under UCF. These corporations have either accessed the market in the past or have institutional capacity to raise funds,” said a senior official with UP’s urban development department.

The Way Forward

To assist cities in taking up urban transformation projects, experts say, efforts have to be made to help them improve their own source revenue through property tax collection and service charges.

“To improve their fiscal health and market readiness, cities can focus on several factors such as increasing the share of their own source revenue in total revenue receipts, improving the growth rate and collection efficiency of property tax, asset monetisation and improving the composition of their expenditure by also focusing on capital expenditure,” said Chakrabarty.

(The writer is an independent journalist. Views expressed are personal.)