HUDCO Financing India’s Urban Future : HUDCO’s Expanding Role in Empowering ULBs

By M. Nagaraj | Director (Corporate Planning) | HUDCO

Urbanising India

As India experiences one of the fastest rates of urbanisation in the world, its cities have become engines of economic activity and social transformation. Yet, this rapid growth places unprecedented pressure on Urban Local Bodies (ULBs)—the municipal institutions responsible for delivering water supply, sanitation, solid waste management, roads, health, education, and other critical services.

While expectations from ULBs continue to rise, their financial capacities have not kept pace. The National Infrastructure Pipeline (NIP) estimates that India requires over Rs. 111 trillion in urban infrastructure investments over the 6-years period of 2019-20 to 2024-25 – a staggering figure that underscores the urgent need for innovative financing strategies. Further, the World Bank estimates that India will require USD 840 billion in capital investment during the period 2021-2036, averaging USD 55 billion annually2, to meet the infrastructure needs of its growing urban population.

Amidst this challenge, the Housing & Urban Development Corporation Ltd. (HUDCO) has emerged as a pivotal institution supporting ULBs through long-term, concessional financing and technical handholding. Over the years, HUDCO has sanctioned Rs. 16,720 crore in direct loans to more than 1,000 ULBs, enabling a wide spectrum of projects—from water supply and sewerage systems to roads, bridges, power infrastructure, and housing.

But as the scale and complexity of urban projects grow, HUDCO is advancing a new generation of financing solutions designed to empower ULBs, reduce dependence on state guarantees, and unlock fresh revenue streams. This article highlights HUDCO’s innovative models across states and outlines the measures proposed to strengthen ULB financing in the years ahead.

Innovative Financing Models: Lessons from Across India

It has always been the endeavour of HUDCO to find innovative financing models for helping the ULBs to undertake various urban infrastructure projects which can be affordable, scalable, and sustainable. Some of the recent financing models are as under:

1.    Rajasthan’s Consolidated Approach to Urban Development

HUDCO’s recent sanction of Rs. 2,235 crore to Rajasthan Urban Drinking Water Sewerage and Infrastructure Corporation Limited (RUDSICO) reflects a new integrated model for funding city-level infrastructure across 238 ULBs. The scheme covers road upgradation, town halls, faecal sludge treatment plants, sewage networks, parks, and biomethanation facilities.

A key innovation lies in the repayment mechanism—loan instalments are deducted directly from ULB grants and routed through a designated Public Deposit account, ensuring transparency and discipline in servicing debt.

2.    Kerala’s Dedicated Revenue Model for Water Supply

Kerala’s large-scale water supply programme, financed through a Rs. 1,000 croreHUDCO loan, uses Motor Vehicle Tax and fuel cess as dedicated revenue streams. The structure includes a no-lien repayment account and a two-quarter debt service reserve—features that offer robustness without burdening ULB budgets.

3.    Tamil Nadu’s TDR-Based Housing Finance

In a unique approach, HUDCO’s assistance for 20,000 EWS green houses in Tamil Nadu was repaid entirely through revenues generated from the sale of Transfer of Development Rights (TDR). This model demonstrates how leveraging urban land value can help fund socially inclusive housing.

4.    Aurangabad’s Revenue-Linked Sewerage System

A combination of sewage cess, recycled water sales, and property tax formed the repayment backbone for HUDCO’s Rs. 192 crore sewerage project. The structured revenue arrangement ensured viability while supporting environmental improvement.

5.    Punjab’s Tax Increment Financing (TIF)

Punjab pioneered a robust TIF model by legislating dedicated funds from incremental VAT collections—leading to HUDCO-assisted programmes of over Rs. 2,500 crore for infrastructure and water supply. By anchoring repayment in statutory funds, Punjab removed repayment risk and paved the way for large-scale upgrades.

6.    Bangalore’s Property Tax Escrow Mechanism

For Bruhat Bengaluru Mahanagara Palike (BBMP), HUDCO used mortgaged land and an escrow of property tax revenues to secure a Rs. 200 crore loan. Structured escrow arrangements, backed by 150% revenue coverage, showcased that even large metropolitan projects can be financed without burdening state budgets.

7.    Madhya Pradesh’s Shared Responsibility Model

HUDCO’s financing for 265 ULBs involved a unique cost-sharing structure where the state financed 75% of repayments through budgetary allocations, and ULBs met the remaining 25%. The model was tied to reforms such as universal metering and appropriate water tariffs, promoting both sustainability and accountability.

8.    Andhra Pradesh’s Tariff-Linked Water Supply Scheme

Hyderabad’s Godavari Drinking Water Supply Scheme linked HUDCO repayments to periodic tariff revisions, new connection charges, property taxes, and betterment levies—ensuring a diversified and resilient revenue framework.

Looking Ahead: Strengthening ULB Financing for India’s Urban Transformation

With demand for urban investment mounting, HUDCO is exploring a set of forward-looking initiatives to expand the financing envelope for ULBs.

1.    Credit Enhancement for Municipal Bonds

India’s municipal bond market is still nascent, and many ULBs lack the credit ratings needed to                    raise funds on their own. HUDCO is examining a Partial Credit Guarantee Scheme that could enhance ULB creditworthiness by 25–50%, potentially enabling them to attain AA ratings and access debt capital markets.

2.    Public–Private Partnership (PPP) Innovations

From the Tirupur water supply system to 24×7 water in Nagpur and Hubli–Dharwad, PPPs have already demonstrated their potential. HUDCO aims to develop PPP frameworks using BOT, Hybrid Annuity, or joint-sector structures—ensuring commercial viability while maintaining public accountability.

3.    Alternative Security Structures Beyond State Guarantees

Not all ULBs can access state-backed guarantees. HUDCO is exploring alternative mechanisms such as: (i) escrow of assured project revenues; (ii) mortgage of land and municipal assets; and (iii) third-party collateral and structured receivables

Such models unlock financing for smaller municipalities that otherwise struggle to access institutional credit.

4.    Capacity Building and Technical Assistance

Financing is only one part of the challenge. ULBs need capacity building support   for a range of activities starting from project identification, structuring, implementation to monitoring.  HUDCO aims to strengthen ULB capacities through training in double-entry accounting; financial management; revenue enhancement; and designing bankable projects.

By empowering ULBs with technical and managerial skills, HUDCO ensures long-term sustainability of investments.

Conclusion: Building Cities that Work

India’s urban transition is not merely a demographic shift—it is an economic imperative. To build cities that are liveable, sustainable, and competitive, ULBs must be equipped with stronger financial tools, diversified revenue streams, and institutional capacity.

HUDCO’s evolving financing models—ranging from tax incremental financing and escrow mechanisms to TDR-backed loans and credit enhancement—offer a pathway to meet the country’s monumental infrastructure needs. As new partnerships emerge with institutions like AIIB, IIFCL, and IREDA, HUDCO is poised to play an even more central role in shaping India’s urban future. By transforming how ULBs mobilise resources and deliver services, HUDCO is helping build the backbone of India’s next-generation cities—resilient, well-governed, and ready to meet the challenges of tomorrow.

(Shilpa Bichitra | Special Edition | 2025)