Banks in India are classified into Scheduled and Non-Scheduled Banks based on their inclusion in the Second Schedule of the Reserve Bank of India Act, 1934. This classification is significant because it determines the privileges, obligations, and regulations that a bank must adhere to under the regulatory framework of the Reserve Bank of India (RBI).
Scheduled Banks
Definition
Scheduled Banks are those banks that are included in the Second Schedule of the Reserve Bank of India Act, 1934. To qualify as a Scheduled Bank, a bank must satisfy certain conditions laid down by the RBI.
Conditions for Inclusion
To be included in the Second Schedule, a bank must fulfill the following conditions:
- Minimum Paid-Up Capital and Reserves: The bank must have a minimum paid-up capital and reserves of at least ₹5 lakh.
- Business Conduct: The bank must conduct its business in a manner that does not jeopardize the interests of its depositors.
- Regulatory Compliance: The bank must adhere to the regulations and guidelines prescribed by the RBI.
Types of Scheduled Banks
- Scheduled Commercial Banks:
- Public Sector Banks: Banks in which the government holds a majority stake. Examples include State Bank of India (SBI), Punjab National Bank (PNB), and Bank of Baroda.
- Private Sector Banks: Banks in which private individuals or entities hold the majority stake. Examples include HDFC Bank, ICICI Bank, and Axis Bank.
- Foreign Banks: Banks incorporated outside India but operating within India. Examples include Citibank, HSBC, and Standard Chartered.
- Regional Rural Banks (RRBs): Banks aimed at providing banking services to rural areas. Examples include Prathama Bank, Baroda UP Gramin Bank.
- Small Finance Banks (SFBs): Banks that focus on providing financial services to underserved and unserved sections of society. Examples include Ujjivan Small Finance Bank, Equitas Small Finance Bank.
- Payments Banks: Banks that can accept deposits and offer payment and remittance services but cannot lend money. Examples include Paytm Payments Bank, Airtel Payments Bank.
- Scheduled Cooperative Banks:
- Urban Cooperative Banks: Cooperative banks that operate in urban and semi-urban areas.
- State Cooperative Banks: Apex cooperative banks at the state level.
Privileges and Obligations
Privileges:
- Borrowing from RBI: Scheduled Banks are eligible to borrow money from the RBI for regular banking purposes under the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF).
- Participation in Clearing Houses: Scheduled Banks can participate in clearinghouse facilities provided by the RBI.
- Access to Financial Markets: Scheduled Banks have access to various financial markets and instruments regulated by the RBI.
Obligations:
- CRR and SLR Requirements: Scheduled Banks must maintain a certain percentage of their net demand and time liabilities as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) with the RBI.
- Adherence to RBI Regulations: Scheduled Banks must comply with all the regulations, guidelines, and directives issued by the RBI.
Non-Scheduled Banks
Definition
Non-Scheduled Banks are those banks that are not included in the Second Schedule of the Reserve Bank of India Act, 1934. These banks do not meet the criteria required for inclusion as Scheduled Banks.
Characteristics
- Lower Paid-Up Capital: Non-Scheduled Banks typically have a lower paid-up capital compared to Scheduled Banks.
- Limited Operational Scale: These banks usually operate on a smaller scale and may have a limited number of branches and customer base.
- Regional Focus: Non-Scheduled Banks often focus on serving specific regions or communities and may not have a nationwide presence.
Types of Non-Scheduled Banks
- Non-Scheduled Commercial Banks:
- These are commercial banks that do not meet the criteria for inclusion in the Second Schedule of the RBI Act.
- Non-Scheduled Cooperative Banks:
- These are cooperative banks that operate on a smaller scale and do not meet the criteria for inclusion in the Second Schedule. They typically serve local or regional communities.
Privileges and Obligations
Privileges:
- Limited Access to RBI Facilities: Non-Scheduled Banks have limited access to the facilities provided by the RBI, such as borrowing from the RBI and participation in clearinghouse operations.
Obligations:
- Regulatory Compliance: Non-Scheduled Banks must comply with certain regulatory requirements set by the RBI, but these requirements are generally less stringent than those for Scheduled Banks.
Differences Between Scheduled and Non-Scheduled Banks
| Feature | Scheduled Banks | Non-Scheduled Banks |
| Inclusion in Second Schedule | Yes | No |
| Minimum Capital Requirements | Higher (at least ₹5 lakh) | Lower |
| Access to RBI Facilities | Full access to borrowing, clearinghouse participation | Limited access |
| Regulatory Compliance | Must comply with all RBI regulations | Comply with fewer RBI regulations |
| CRR and SLR Requirements | Must maintain CRR and SLR with the RBI | Not required to maintain CRR and SLR with the RBI |
| Operational Scale | Generally larger with nationwide presence | Typically smaller with regional focus |
Summary
The classification of banks into Scheduled and Non-Scheduled categories by the RBI is crucial for regulating the banking sector and ensuring financial stability in India. Scheduled Banks, which include a wide range of commercial and cooperative banks, enjoy certain privileges and must adhere to stringent regulatory requirements. Non-Scheduled Banks, on the other hand, operate on a smaller scale and have limited access to RBI facilities. Understanding these classifications helps in appreciating the diverse nature of the banking sector in India and the regulatory framework that supports its functioning.
