The report highlighted urban areas are expected to contribute nearly 70 per cent of India’s GDP by 2036, making sustainable financing for cities a national priority.
It said the Urban Challenge Fund, a Rs 1 lakh crore central government-backed scheme, is aimed at changing the urban financing model by moving cities from grant-based support to market-based funding. It said the scheme could help generate nearly Rs 4 lakh crore in urban investment over five years.
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Under the fund, urban local bodies will have to raise at least 50 per cent of project financing through municipal bonds, bank loans or public-private partnerships before central support is released. The Centre will contribute 25 per cent of project costs, while the remaining share will come from states or urban local bodies.
The report noted this financing model is expected to strengthen financial discipline and transparency, while also improving the creditworthiness of cities. It added that credit ratings will become critical for cities, particularly Tier-II and Tier-III urban centres, to access market financing.
It also highlighted the limited development of municipal bond markets, stating, “Since FY18, only 17 cities have issued municipal bonds, amounting to INR 45.4 billion, highlighting the large untapped financing opportunity in the sector,” said Manu Sehgal, CEO, Brickwork Ratings.Further, investor confidence in municipal bonds has significantly improved, reflected in the drop in yield spreads from ~480 bps (FY20) to ~155 bps (FY26) versus the RBI Repo Rate. It indicates material drop in risk premium over the RBI benchmark.
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The report added that smaller urban centres, including 4,223 urban local bodies and north-eastern towns, currently have little access to market debt and may benefit from the fund’s Rs 5,000 crore Credit Repayment Guarantee Scheme.