When bankability takes precedence over vulnerability, smaller, resource-constrained cities risk being left behind. Heat-resilience funding must be guided by need, not a municipality’s ability to borrow
Published Date – 15 October 2026, 10:48 PM
Illustration: GuruG
By Anugraha John and Dr Tarun Arora
In 2013, Ahmedabad became the first city in South Asia to adopt a Heat Action Plan after a deadly 2010 heatwave. It remains the template for more than 130 Indian cities, although only 64 plans have been formally approved. Implementing a plan requires clearly defined institutional responsibilities, budgets that last beyond a year, and financing that turns commitments into cooling centres and early warning systems.
Courts have long read Article 21 to include protection from environmental hazards, and several States now notify heatwaves as disasters under the Disaster Management Act, 2005, placing a statutory duty on state and district authorities to prepare for them. That duty does not depend on a municipality’s ability to raise capital. There is a mismatch between the legal nature of the obligation and the instrument used to finance it. India’s urban finance architecture increasingly funds heat resilience through competitive, discretionary instruments that assume repayment capacity.
Urban Challenge Fund
In April 2026, the Centre released guidelines for the Urban Challenge Fund — a Rs 1 lakh crore central assistance programme that lists climate resilience among its eligible categories. Central assistance covers only 25 per cent of a project’s cost, with the city contributing another 25 per cent from its own funds and raising the remaining 50 per cent through bonds, bank loans, or public-private partnerships (PPP).
Full access to the Fund is limited to cities with a population above 10 lakh, State capitals, and major industrial towns with a population exceeding 1 lakh. Smaller urban local bodies sit outside the main Fund, and a city that cannot raise its own share receives no matching central assistance, regardless of the extent of its heat stress.
To widen access, the government also offers a Rs 5,000 crore Credit Repayment Guarantee Scheme, backing loans of up to Rs 7 crore, or 70% of a first-time municipal loan, for Tier-II and Tier-III cities. However, its logic runs into difficulties in towns such as Ballia, Uttar Pradesh, a district headquarters with just over one lakh people, where a June 2023 heatwave killed 54 people at the district hospital. At this scale, a town may lack the audit history or credit rating needed to leverage a guarantee. The scheme eases the exclusion of smaller cities but does little for those that lack the institutional capacity to access it.
Weaker municipalities need technical support and project-preparation capacity to ensure heat protection reaches communities that need it most
Even for qualifying cities, the market route is strained. A recent study notes that a financially sound municipality can typically borrow at 8-9 per cent, while a private PPP partner expects returns closer to 15-16 per cent. Early warning systems and cooling centres do not generate the revenue stream that commercial debt service assumes. Financing them at market rates therefore requires a protective public function to operate as though it were a revenue-generating asset. Nearly three decades after Ahmedabad issued India’s first municipal bond in 1998, only 22 cities have raised money through municipal bonds, amounting to a combined Rs 4,540 crore.
The Cost of Bankability
Municipal own-source revenue has hovered under half a per cent of GDP for a decade. The study finds that, if urban local bodies fund their 25 per cent share and service the required borrowings, their own-source revenue would need to grow by roughly 14.4 per cent annually through 2030-31. This figure is against an actual decade-long growth rate of about 10%. The funding gap is projected to peak in 2030-31.
The mechanics and the arithmetic point to the same conclusion: bankability and vulnerability are not the same distribution. A city’s ability to raise a loan says little about how many of its residents work outdoors or live in informal settlements without access to cooling. Infrastructure finance asks which cities can execute projects and repay loans—a fair question for a metro line or a sewage plant.
A statutory protective duty, by contrast, asks which cities are most exposed and least able to protect themselves. Where the two diverge, a gate built for the first will fail the second, in precisely the cities the duty was meant to reach. None of this is an argument against municipal borrowing. A protective public function should be allocated by exposure and need, not an applicant’s ability to borrow.
What Needs to Change
Climate resilience appears among the Fund’s eligible themes, but the guidelines contain no cross-cutting technical norm requiring that a funded project actually be climate-resilient. A city that clears the bankability bar can build almost anything within these eligible categories.
If the Fund is to serve as India’s primary vehicle for climate adaptation finance, its resilience vertical needs its own allocation logic, weighted by heat exposure and informal sector population share, paired with a mandatory technical standard defining what constitutes a climate-resilient project. The Fund should also include an upfront tranche of capacity-building finance to help urban local bodies with limited institutional capacity to prepare bankable proposals, rather than requiring them to look investable first.
The distinction is between financing a project and financing the capacity to identify and prepare one. India’s fiscal architecture has confronted a similar debate over tied versus untied grants. The Fifteenth Finance Commission tied 60 per cent of the basic grant for urban local bodies to sectors such as water. After pushback from local bodies, the Sixteenth Finance Commission reduced the tied share to 50 per cent, raising the overall untied share of grants to roughly 60 per cent.
The Fund’s capacity-building component risks repeating the earlier mistake on a smaller scale by bundling preparatory finance with the same qualifying conditions that exclude thinner-capacity, or limited institutional capacity, urban local bodies from the main Fund. A genuinely enabling tranche would look more like an untied grant, providing the third tier of government with the resources to prepare projects that reflect its priorities.
The next chapter of India’s heat policy will not be settled by how many Heat Action Plans it produces. A better financing architecture would account for exposure and vulnerability, and give thinner cities the technical and institutional capacity to prepare and carry out projects. A city’s inability to raise capital should not be mistaken for an absence of need.
(Anugraha John is graduate student, Public Policy, and Dr Tarun Arora is Associate Professor and Associate Dean, Jindal School of Government and Public Policy, OP Jindal Global University)
