The Reserve Bank of India (RBI) on July 31, 2026, issued the Reserve Bank of India (Local Area Banks – Compliance Function) Directions, 2026, in exercise of powers under Section 35-A of the Banking Regulation Act, 1949. Applicable to all Local Area Banks and effective immediately, the Directions establish minimum standards for the compliance function as a core element of corporate governance, aligned with the Basel Committee on Banking Supervision framework and adapted to the Indian context, while allowing banks to organise the function according to their size, complexity, and risk profile. The Directions define "Compliance Risk" and mandate that banks maintain a Board-approved Compliance Policy, reviewed at least annually.
Chapter II places overall responsibility for compliance oversight on the Board, which must ensure timely resolution of compliance issues, keep the Compliance function separate from Internal Audit, and review compliance performance quarterly through the Board or Audit Committee. Senior management, led by the MD & CEO, must maintain an independent Compliance function, identify and assess compliance risks annually, and promptly report material compliance failures to the Board. Chapter III requires banks to set up a Head Office Compliance Department headed by the Chief Compliance Officer (CCO), extend compliance units to controlling offices and branches, ensure adequate independent staffing without conflicting audit duties, and decouple compliance staff remuneration from the business lines they monitor, while also implementing group-wide compliance programmes across subsidiaries.
The Directions further detail the Compliance Department's operational responsibilities, including vetting internal circulars for regulatory compliance, serving as a reference point for staff queries, proactively assessing risks in new products with intensive monitoring for the first six months, and maintaining function-wise compliance manuals. Subsequent chapters (not excerpted in full) address the CCO's appointment, authority, independence and reporting lines, the use of technology for compliance monitoring, and repeal of earlier applicable circulars alongside standard interpretive provisions tying undefined terms to the RBI Act, 1934, the Banking Regulation Act, 1949, the Companies Act, 2013, and RBI's Glossary of Terms.
[Notification No. RBI/DoS/2026-27/444, DoS.CO.PPG.38/11.01.005/2026-27]
