Smaller municipalities face challenges in raising funds from market: Report

MUMBAI: The government’s push to shift urban financing from grants to market-linked funding under the Urban Challenge Fund (UCF) could face significant hurdles in Tier II and Tier III cities, where weak financial reporting systems and limited institutional capacity may constrain access to market borrowings, a Brickwork Ratings report said.

The report, titled “From grants to markets: How Urban Challenge Fund (UCF) will reshape urban finance in India,” noted that while the INR 1 trillion central Govt scheme seeks to unlock nearly Rs 4 lakh crore in urban investments over five years, its design hinges critically on the ability of urban local bodies (ULBs) to raise at least 50% of project funding from market sources such as municipal bonds, bank loans, or public-private partnerships.

This requirement makes credit ratings essential for accessing capital markets, but smaller cities remain structurally underprepared. The report said that Tier II and Tier III cities suffer from poor data quality and lack of audited transparent financial disclosures which makes it difficult to get a credit rating.

The challenge is compounded by capacity constraints within municipal administrations. The report added that “Many ULBs lack the skilled manpower, financial expertise, and technical know-how to structure complex” market-linked financing instruments, limiting their ability to tap diversified funding sources.

India’s broader urban financing needs remain substantial, with the report estimating that nearly Rs 80 lakh crore will be required by 2037 to support rapid urbanisation and economic growth. Urban centres are expected to contribute about 70% of the country’s GDP by 2036, making the success of such financing frameworks critical.

While the UCF aims to improve fiscal discipline, transparency, and creditworthiness by mandating market participation, Brickwork Ratings flagged execution risks, particularly for smaller municipalities that have historically depended on grants and state-backed funding.
“The UCF could significantly deepen India’s municipal finance ecosystem, particularly by expanding participation in the municipal bond market. Since FY18, only 17 cities have issued municipal bonds, amounting to Rs 45.4 billion, highlighting the large untapped financing opportunity in the sector,” said Manu Sehgal, CEO, Brickwork Ratings.

At the same time, the report pointed to a large untapped opportunity among 4,223 smaller ULBs and north-eastern urban centres, which currently have little to no access to market debt. Measures such as the UCF’s Rs 5,000 crore Credit Repayment Guarantee Scheme are expected to support first-time borrowers, but structural gaps in governance, accounting, and capacity could slow adoption.

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