Centre nudges DFIs towards blended finance to cut cost of urban build-out

The Union finance ministry has advised them to explore partnerships with multilateral agencies, such as the World Bank, Asian Development Bank, Japan International Cooperation Agency (JICA), and International Finance Corp. (IFC), on blended financing, according to two people close to the development.

The strategy pairs concessional funds with commercial capital and taps multilateral equity participation while drawing on global expertise to make large-scale urban investments more viable, the people added.

“Blended financing and collaborating with multilateral institutions will reduce the cost of developing urban infrastructure. We also need stakeholders to bring in their international experience," said the first person, on condition of anonymity.

State-backed DFIs and infrastructure funds include the National Bank for Financing Infrastructure and Development (NaBFID) and the National Investment and Infrastructure Fund (NIIF).

Financing requirements

India will need to invest an average of $55 billion a year in urban infrastructure by 2036, according to a World Bank estimate.

The Washington-headquartered agency estimated that by 2036, Indian towns and cities will be home to 600 million people, or 40% of the country's population, up from 31% in 2011. Urban areas will contribute almost 70% to its gross domestic product.

At present, a majority of urban infrastructure projects are financed by the government.

The central and state governments finance over 75% of city infrastructure, while urban local bodies (ULBs) finance 15% through their own surplus revenues.

To be sure, blended finance for urban infrastructure is a funding approach that combines concessional capital from public or philanthropic sources with commercial capital from private investors and development finance institutions to make projects financially viable and attractive.

“Blended finance can unlock the scale of funding needed for capital-intensive urban projects that are otherwise too large or risky for governments, private players, or development finance institutions to finance on their own," said the second person, who also spoke on condition of anonymity.

“Blended financing is the way forward. On a purely commercial basis, many large-scale ventures simply won’t be viable," said Madan Sabnavis, chief economist at Bank of Baroda.

“The challenge lies in securing funds from multilateral agencies at concessional rates. Earlier, India benefited from significant concessional support as a developing economy, but I am not sure if that still applies. NaBFID, for instance, is borrowing at around 7%; to fund these projects effectively, it will need access to concessional financing," he added.

Centre's contribution

To be sure, the central government’s own spending on capital expenditure, which includes investments in infrastructure, has accelerated during 2025-26 after a mild slowdown in 2024-25.

The Centre’s capital spending on infrastructure rose to ₹3.47 trillion in April-July from ₹2.61 trillion in the year-ago period, according to ministry of finance data.

In 2024-25, the revised estimates reduced the government's budgeted capex from ₹11.11 trillion to ₹10.18 trillion, with actual spending amounting to ₹10.52 trillion.

Rajkiran Rai, managing director of NaBFID, told Mint that while partnerships with multilateral agencies, the government, and DFIs are well-established in energy and renewables, with proven models in solar, wind, and storage sectors, the real challenge now is in urban infrastructure, which requires large-scale investment.

“That is why we are proposing to explore blended finance. We are collaborating with multilateral agencies to help reduce the cost of urban infrastructure," he said.

“We also want to get into the equity funding with multilaterals," he added.

Rai said multilateral institutions must step in and bring their international experience to the table.

“We need to bring significant innovation into financing, particularly in the urban infrastructure space, which requires substantial funding. Innovation will be critical to meeting those needs," he added.

A World Bank spokesperson said it is supporting India’s urban infrastructure through catalytic tools such as targeted credit enhancements and guarantees to manage risk, concessional partner resources to lower costs, and technical assistance and transaction structuring to attract long-term private capital.

“Talks are underway on municipal financing, including new platforms to leverage local long-term capital for infrastructure. Proposals include credit enhancement and standardized project preparation to help urban local bodies with ratings below AA access capital markets. A similar approach is being explored at the state level," the spokesperson said.

“For instance, we are in talks with NaBFID on platforms to tap long-term resources from pension and insurance funds. A first-of-its-kind credit enhancement facility is central to this effort," the spokesperson said.

The spokespersons of the NIIF, Asian Development Bank, JICA, IFC, and the ministry of finance didn’t respond to Mint's emailed queries.