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India is home to a large number of banks. These banks cater to the diverse needs of Indian citizens. The Reserve Bank of India (the central bank of India) has several regulations that regulate banks and their working. Banks are classified as public banks and private banks. There are scheduled, and non-scheduled banks among them.
Scheduled Banks
Scheduled banks are those banks that are listed in the 2nd schedule of the Reserve Bank of India Act, 1934. The Scheduled banks have a capital requirement of a minimum of Rupees five lakhs. The major advantage that these banks have is that they can raise funds from the Reserve Bank at low-interest rates and also automatically become members of clearinghouses.
However, these banks need to keep a minimum balance with the Reserve Bank daily. This balance is referred to as the Cash Reserve Ratio or CRR. All the commercial banks, national and international banks, cooperative, and regional rural banks are Scheduled banks in India.
Scheduled banks in India can be broadly classified into the following – commercial public sector banks, State Bank of India and its associate banks, commercial private banks, and finally the scheduled foreign banks running in India.
There are several advantages that the Scheduled banks have over the non-scheduled banks. Some of such advantages are that these banks can borrow funds from the Reserve Bank, they can access currency storage infrastructure, and the membership to a clearinghouse is by default. Scheduled banks must send periodic reports to the Reserve Bank.
To become a scheduled bank there are certain conditions like the bank must be a company and not an individual or partnership firm; the company must have a paid-up capital of rupees five lakhs, and it must convince the Reserve bank that it would not jeopardize the interests of the depositors.
Non-Scheduled Banks
Non-scheduled banks are those that are not listed in the 2nd Schedule of the Reserve Bank of India Act 1934. These banks essentially do not comply with the requirements that are set out by the central bank of the country. As they are not listed in the schedule, they are thought to be not capable of protecting and promoting depositors’ interests.
However, it is important to point out that non-scheduled banks also need to keep the cash reserve ratio, not with the central bank but with themselves. Their influence is narrow. These banks are generally very small. They are immensely risky to do business with. Their paid-up capital is less than Rupees five lakhs.
There are eleven State cooperative banks that are classified as non-scheduled banks. There are more than 1000 urban cooperative banks that are classified as non-scheduled banks. Usually, the non-scheduled banks are not allowed to take loans from the Reserve Bank of India. These banks are also not eligible to be members of clearinghouses. This means that they cannot allow inter-bank transactions for their customers.
Non-scheduled banks do not have to send any periodic reports to the Reserve Bank unless it is asked to do so.
Comparing Scheduled and Non-Scheduled Banks
Factor | Scheduled Banks | Non-scheduled banks |
Presence in the second schedule | They are listed in the second schedule of the Reserve Bank of India Act 1934 | They are not listed in the second schedule of the Reserve Bank of India Act 1934 |
Meaning | A scheduled bank is a duly registered company with a paid-up capital of more than Rupees five lakhs | There is no such express requirement for non-scheduled banks |
Cash Reserve Ratio (CRR) | CRR is kept with the Reserve Bank of India | CRR is kept within the non-scheduled bank itself |
Borrowing | The scheduled banks are allowed to borrow from the Reserve Bank of India | Non-scheduled banks are not allowed to borrow from the Reserve Bank unless in an emergency |
Risk | Scheduled banks are considered to be less risky and it is not usual for the scheduled banks to hurt the depositor interests. | Non-scheduled banks are considered risky |
Reports to the Reserve Bank | Scheduled banks have to mandatorily send periodic reports to the Reserve Bank | Non-scheduled banks are not expected to file any reports to the Reserve Bank |
Clearinghouses | Scheduled banks automatically become the members of clearinghouses | Non-scheduled banks do not have a membership to the clearinghouses |
Conclusion
Banks mentioned in the second schedule of the Reserve Bank of India Act 1934 makes a bank scheduled and those that are not mentioned there make it non-scheduled. This is the primary difference between scheduled non-scheduled banks. There are also other requirements like paid-up capital, being a registered company, keeping a cash reserve ratio with the Reserve Bank that differentiate between scheduled and non-scheduled banks in India.
