Reserve Bank of India (Urban Co-operative Banks - Internal Audit Function) Directions, 2026

RBI/DoS/2026-27/440 DoS.CO.PPG.34/11.01.005/2026-27 July 31, 2026

Reserve Bank of India (Urban Co-operative Banks - Internal Audit Function) Directions, 2026

Table of Contents

• Introduction
• Chapter I - Preliminary
  • A. Short Title and Commencement
  • B. Applicability
  • C. Definitions
• Chapter II - Governance and Oversight
  • A. Role of the Board
  • B. Role of the Senior Management
• Chapter III - Risk-Based Internal Audit Framework
  • A. Policy on Internal Audit
  • B. Objectives and Scope
  • C. Authority, Stature, and Independence
  • D. Risk Assessment
  • E. Audit Plan
  • F. Monitoring of Compliance
  • G. Outsourcing
• Chapter IV - Head of Internal Audit
  • A. Authority, Stature, and Independence
  • B. Tenure
  • C. Reporting Line
• Chapter V - Inspection and Internal Audit System
  • A. System and Structure
  • B. Periodicity and Coverage
  • C. Special Audits
  • D. Other Instructions
• Chapter VI - Repeal and Other Provisions
  • A. Repeal and Saving
  • B. Application of Other Laws Not barred
  • C. Interpretations

Introduction

An independent and effective Internal Audit function is integral to sound corporate governance in Urban Co-operative Banks and provides assurance to the Board and senior management on the adequacy and effectiveness of internal controls, risk management, and governance. Given the commonality of risks faced by Urban Co-operative Banks, there is a need for harmonised Internal Audit systems and processes based on uniform guiding principles. Risk-Based Internal Audit (RBIA) framework, as the third line of defence, is intended to strengthen the effectiveness of Internal Audit systems and processes in Urban Co-operative Banks.

In exercise of the powers conferred by Section 35-A read with Section 56 of the Banking Regulation Act, 1949, and all other provisions / laws enabling the Reserve Bank of India (‘RBI’) in this regard, RBI being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues Directions hereinafter specified.

Chapter I - Preliminary

A. Short Title and Commencement

1. These Directions shall be called the Reserve Bank of India (Urban Co-operative Banks - Internal Audit Function) Directions, 2026.
2. These Directions shall come into effect immediately upon issuance.

B. Applicability

3. These Directions shall be applicable to Urban Co-operative Banks (hereinafter collectively referred to as ‘UCBs’ and individually as ‘UCB’).

For the purpose of these Directions, ‘Urban Co-operative Banks’ shall mean Primary Co-operative Banks as defined under Section 5(ccv) as applicable to co-operative societies, read with Section 56 of Banking Regulation Act, 1949.

Provided that Chapter II, III and IV of these Directions shall be applicable to UCBs having asset size of ₹500 crore and above except Salary Earners UCBs, Unit UCBs, and UCBs under All Inclusive Directions.

Provided that Chapter V of these Directions shall be applicable to UCBs having asset size of less than ₹500 crore, all Salary Earners UCBs, Unit UCBs, and UCBs under All Inclusive Directions.

C. Definitions

4. All expressions used in these Directions, shall have the same meaning as have been assigned to them under the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, the Companies Act, 2013, or any statutory modification or re-enactment thereto or other regulations issued by RBI or the Glossary of Terms published by RBI or as used in commercial parlance, as the case may be.

Chapter II - Governance and Oversight

A. Role of the Board

5. The Board / Audit Committee of Board (ACB) of the UCB shall be primarily responsible for overseeing the Internal Audit function. It shall approve a RBIA plan to determine the priorities of the Internal Audit function based on the level and direction of risk, consistent with the UCB’s goals.
6. The Board / ACB shall review the performance of RBIA. The Board / ACB should formulate and maintain a quality assurance and improvement program that covers all aspects of the Internal Audit function. The quality assurance program may include assessment of the Internal Audit function at least once a year for adherence to the Internal Audit policy, objectives, and expected outcomes.
7. The Board / ACB shall promote the use of new audit tools / new technologies for reducing the extent of manual monitoring / transaction testing / compliance monitoring.
8. The Board should prescribe a minimum period of service for staff in the Internal Audit function except for those UCBs where the Internal Audit function is a specialised function and managed by career internal auditors. The Board may also examine the feasibility of prescribing at least one stint of service in the Internal Audit function for those staff possessing specialised knowledge useful for the audit function, but who are posted in other areas, so as to have adequate skills for the staff in the Internal Audit function.

B. Role of the Senior Management

9. The senior management is responsible for ensuring adherence to the Internal Audit Policy as approved by the Board and development of an effective internal control function that identifies, measures, monitors, and reports all risks faced. It shall ensure that appropriate action is taken on the Internal Audit findings within given timelines and status on closure of audit reports is placed before the Board / ACB.
10. The senior management shall be responsible for establishing a comprehensive and independent Internal Audit function which should promote accountability and transparency. It shall ensure that the Internal Audit function is adequately staffed with skilled personnel of right aptitude and attitude who are periodically trained to update their knowledge, skill, and competencies.
11. The senior management shall, based on inputs from all forms of audit, present a consolidated position of major risks faced by the UCB at least annually to the Board / ACB.

Chapter III - Risk-Based Internal Audit Framework

A. Policy on Internal Audit

12. The Risk-Based Internal Audit (RBIA) Framework relies broadly on a well-defined policy for Internal Audit, functional independence with sufficient standing, effective channels of communication and adequate audit resources with sufficient professional competence.
13. The Board approved policy shall clearly document the purpose, authority, and responsibility of the internal audit activity, with a clear demarcation of the role and expectations from Risk Management function and Risk Based Internal Audit function. The policy should be consistent with the size and nature of the business undertaken, the complexity of operations and should factor in the key attributes of Internal Audit function relating to independence, objectivity, professional ethics, and accountability.
14. The policy should also lay down the maximum time period beyond which even the low-risk business activities / locations would not remain excluded for audit.
15. The policy should be reviewed periodically and disseminated widely within the organisation.

B. Objectives and Scope

16. RBIA as an effective audit methodology should link the UCB's overall risk management framework and provide assurance to the Board and the senior management on the quality and effectiveness of the UCB’s internal controls, risk management, and governance related systems and processes.
17. The Internal Audit function should assess and contribute to the overall improvement of the UCB’s governance, risk management, and control processes using a systematic and disciplined approach. It should work on the basis of established policies and procedures as approved by the Board / ACB.
18. RBIA, in addition to selective transaction testing, shall include an evaluation of the risk management systems and control procedures in various areas of operations, which will also help in anticipating areas of potential risks and mitigating such risks.
19. While the Risk Management function should focus on identification, measurement, monitoring, and management of risks, development of risk policies and procedures, and use of risk management models, RBIA should undertake an independent risk assessment for the purpose of formulating a risk-based audit plan which considers the inherent business risks emanating from an activity / location and the effectiveness of the control systems for monitoring such inherent risks.
20. The Internal Audit function should assess and make appropriate recommendations to improve the governance processes on business decision making, risk management and control; promote appropriate ethics and values within the UCB; and ensure effective performance management and staff accountability.

C. Authority, Stature, and Independence

21. The Internal Audit function shall have sufficient authority, stature, independence and resources, thereby enabling internal auditors to carry out their assignments properly.
22. The UCB shall not link the remuneration of Internal Audit staff to the financial performance of the business lines for which they exercise audit responsibilities. Accordingly, the UCB shall structure the remuneration policies in a way to avoid creating conflict of interest and compromising audit’s independence and objectivity.
23. The Internal Audit function should be kept informed of all developments, including introduction of new products, changes in reporting lines, and changes in accounting practices / policies.
24. Requisite professional competence, knowledge, and experience of each internal auditor is essential for the effectiveness of internal audit function. The areas of knowledge and experience may include banking / financial entity’s operations, accounting, information technology, data analytics, forensic investigation, among others. The collective skill levels should be adequate to audit all areas of the UCB.

D. Risk Assessment

25. RBIA shall undertake an independent risk assessment for the purpose of formulating a risk-based audit plan. This risk assessment should cover risks at various levels / areas (corporate and branch, the portfolio and individual transactions) as also the associated processes. Such risk assessment of business and other functions of the organisation shall at the minimum be conducted on an annual basis. The assessment should also be periodically updated to take into account changes in business environment, activities, and work processes.
26. Every activity / location, including the risk management and compliance functions, shall be subjected to risk assessment by the RBIA.
27. The risk assessment in the Internal Audit department should be used for focusing on the material risk areas and prioritising the audit work.
28. The risk assessment process should, inter alia, include identification of inherent business risks in various activities undertaken, evaluation of the effectiveness of the control systems for monitoring the inherent risks of the business activities (‘Control risk’) and drawing-up a risk-matrix for both the factors viz., inherent business risks and control risks.
29. The basis for determination of the level (high, medium, low) and trend (increasing, stable, decreasing) of inherent business risks and control risks should be clearly spelt out.
30. The risk assessment may make use of both quantitative and qualitative approaches. While the quantum of credit, market, and operational risks could largely be determined by quantitative assessment, the qualitative approach may be adopted for assessing the quality of overall governance and controls in various business activities.
31. The risk assessment methodology should, inter alia, cover the following parameters:

• (1) Previous internal audit reports and compliance;
• (2) Proposed changes in business lines or change in focus;
• (3) Significant change in management / key personnel;
• (4) Results of regulatory examination report;
• (5) Reports of external auditors;
• (6) Industry trends and other environmental factors;
• (7) Time elapsed since last audit;
• (8) Volume of business and complexity of activities;
• (9) Substantial performance variations from the budget; and
• (10) Business strategy of the UCB vis-à-vis the risk appetite and adequacy of control.

E. Audit Plan

32. The UCB may prepare a Risk Audit Matrix based on the magnitude and frequency of risk. Based on the matrix, the Audit Plan should prioritise audit work to give greater attention to the areas of:

• (1) High magnitude and high frequency
• (2) High magnitude and medium frequency
• (3) High magnitude and low frequency
• (4) Medium magnitude and high frequency
• (5) Medium magnitude and medium frequency
• (6) Low magnitude and high frequency

33. Before taking up specific internal audit assignment, the plan, scope, objectives, timelines and resource allocations of the assignment should be clearly established. The scope and objectives of the assignment should be based on a preliminary assessment of the risks relevant to the business activity under review.
34. The scope of the audit and resource allocation should be sufficient to achieve the objectives of the audit assignment. The precise scope of RBIA shall be determined by the UCB for low, medium, high, very high, and extremely high-risk areas. The scope of internal audit should also include system and process audits in respect of all critical processes. The findings of system audits should also be placed before the IT Committee of the Board.
35. The Internal Audit report should be based on appropriate analysis and evaluation. It should bring out adequate, reliable, relevant, and useful information to support the observations and conclusions. It should cover the objectives, scope, and results of the audit assignment and make appropriate recommendations and / or action plans.

F. Monitoring of Compliance

36. The Internal Audit function should have a system to monitor compliance to the observations made by internal audit. Status of compliance should be an integral part of reporting to the Board / ACB.
37. All pending high and medium risk paras and persisting irregularities should be reported to the Board / ACB in order to highlight key areas in which risk mitigation has not been undertaken despite risk identification.
38. The RBIA shall have proper Management Information System (MIS) and data integrity arrangements.

G. Outsourcing

39. The UCB shall not outsource the Internal Audit function. However, where required, the UCB can hire experts, including former employees, on a contractual basis subject to the Board / ACB being assured that such expertise does not exist within the audit function of the UCB. Any conflict of interest in such matters shall be recognised and effectively addressed. Ownership of audit reports in all cases shall rest with regular functionaries of the Internal Audit function.