The Reserve Bank of India (RBI) on July 31, 2026, exercising powers under Section 35-A read with Section 56 of the Banking Regulation Act, 1949, issued the "Reserve Bank of India (Urban Co-operative Banks - Internal Audit Function) Directions, 2026" with immediate effect, applicable to all Primary (Urban) Co-operative Banks (UCBs). Chapters II, III, and IV apply to UCBs with asset size of ₹500 crore and above (excluding Salary Earners UCBs, Unit UCBs, and UCBs under All Inclusive Directions), while Chapter V applies to UCBs below this threshold and the excluded categories. The Directions institute a Risk-Based Internal Audit (RBIA) framework as the "third line of defence," requiring Board/Audit Committee oversight, a Board-approved Internal Audit policy, functional independence, and adequate skilled resources.
For applicable UCBs, the framework mandates independent risk assessment covering inherent business risks and control risks across activities and locations, a risk-based Audit Plan prioritising high-magnitude/high-frequency areas, and monitoring of compliance with audit observations reported to the Board/ACB. The Internal Audit function cannot be outsourced, though experts may be hired on a contractual basis. A Head of Internal Audit (HIA) must be a senior executive with a minimum three-year tenure, reporting directly to the Board/ACB/MD & CEO/WTD, with no reporting relationship to business verticals or business targets. Smaller UCBs and excluded categories must maintain an Inspection and Internal Audit system covering all branches at least once every 12 months, supplemented by surprise inspections, revenue audits, and special scrutiny of high-value accounts and transferred officials.
The Directions repeal all prior guidelines on Internal Audit function for UCBs (communicated via circular dated July 31, 2026) while preserving rights, liabilities, and proceedings arising under the repealed framework, and operate in addition to other applicable laws. RBI retains final authority to interpret and clarify any provision of these Directions.
[Notification No. RBI/DoS/2026-27/440, DoS.CO.PPG.34/11.01.005/2026-27]
