Difference between Scheduled and Non-Scheduled Banks

The Reserve Bank of India (RBI) is the main regulatory body in the Indian banking system, which divides banks into Scheduled and Non-Scheduled banks. This differentiation depends on a bank's compliance with particular standards and its listing in the Reserve Bank of India Act, 1934's Second Schedule. As the name implies, scheduled banks are those that are properly listed in the Second Schedule and meet the criteria stated in Clause 42 of the Act mentioned above. On the other hand, non-scheduled banks are not covered by the previously mentioned Schedule and function outside the scope of the RBI's regulations.

By definition, banks are intermediary financial institutions that take deposits from the general public and direct them toward people or businesses that are looking for credit.

Banks are an essential part of the financial system that promotes the development and expansion of the economy. The Banking Regulation Act 1949 in India sets forth regulations for the operations of Scheduled and Non-Scheduled banks. A wide range of financial institutions are included in the schedule of banks, such as nationalized banks, foreign banks, private commercial banks, development banks, cooperative banks, and regional rural banks.

On the other hand, non-scheduled banks are not subject to the regulations set forth by the RBI. The main differences between Scheduled and Non-Scheduled banks in the Indian banking system are explored in this article.

Scheduled Banks

Scheduled Banks are defined as banks listed under the Reserve Bank of India Act, 1934, Second Schedule. To be eligible for this designation, a bank must have raised funds totaling Rs 5 lakh and have a minimum paid-up capital. The Reserve Bank of India provides designated banks with low-interest loans and clearing house memberships, among other special benefits.

These benefits do, however, come with matching responsibilities. Scheduled Banks must keep a daily average Cash Reserve Ratio (CRR) balance with the central bank, according to the rates set by the organization. The Reserve Bank of India also permits Scheduled Banks to borrow money at bank rates.

All commercial banks, including nationalized banks, foreign banks doing business in India, cooperative banks, and local rural banks, fall under the Scheduled Banks classification. The Scheduled Commercial Banks are further separated into two categories: the Scheduled Private Sector Commercial Banks, which are further divided into Old Private Banks and New Private Banks, and the Scheduled Public Sector Commercial Banks, which comprise SBI and its affiliates.

It is noteworthy that foreign banks operating in India that are not scheduled may not be eligible for the same benefits as scheduled banks.

Features of Scheduled Banks

Institutions hoping to be designated as scheduled banks have to meet certain requirements as per regulations. First, a bank must have a minimum total value of Rs. 5 lacs in both paid-up capital and reserve funds. Furthermore, the bank has to prove to the central bank that it manages its business in a way that protects the interests of its customers. Only corporations are eligible for scheduled bank status; sole proprietorships and partnership firms are not.

On the other hand, scheduled banks are given special rights. Their liquidity position is strengthened by their ability to access refinancing facilities from the apex bank (RBI). Moreover, they have the right to utilize currency chest facilities, which allow them to oversee the physical movement of currency effectively.

Lastly, scheduled banks are eligible to join clearing houses, which facilitates interbank settlements and improves the efficiency of the financial system.

Essential Roles of Scheduled Banks

• Accept deposits from the general public.
• Establish a mechanism for withdrawal on demand for customers.
• Credit arrangement.
• Money Transfer.
• Publication of drafts.
• Provide the availability of lockers to customers.
• Manage foreign exchange.

Non-Scheduled Banks

The Reserve Bank of India (RBI) Act, 1934, established an Indian bank classification system. Non-scheduled banks are those not listed on the Second Schedule of this Act. Simply put, these are banks that don't follow the RBI's rules and specifications to the letter. This non-compliance can take many different forms, like failing to meet certain capital adequacy standards, performing assigned duties, or having the safeguards in place that the RBI deems necessary to protect depositor interests.

The way scheduled and non-scheduled banks handle cash reserve requirements (CRR) is a crucial distinction between them. It is required of scheduled banks to deposit a certain percentage of their total deposits with the RBI.

On the other hand, non-scheduled banks are free to keep their CRR on hand within their own establishments rather than having to deposit it with the RBI. Because of this feature of their operations, non-scheduled banks are frequently referred to as "local area banks" because their influence and reach are usually limited to a particular area.

Features of Non-Scheduled Banks

In the Indian financial system, non-scheduled banks are one type of private banking establishment. Like their scheduled counterparts, these institutions provide a variety of financial services to the general public and businesses. The main difference is whether or not they are listed on the Reserve Bank of India (RBI). Furthermore, non-scheduled banks might only meet some requirements listed in Clause 42 of the Act. They still have to follow the guidelines that the RBI has established, though.

A notable distinction between banks that are scheduled and those that are not concerns the Cash Reserve Ratio (CRR). It is required of scheduled banks to deposit a certain percentage of their deposits with the RBI.

On the other hand, non-scheduled banks are exempt from this requirement and are allowed to hold onto their CRR funds.

A further distinguishing feature is the minimum reserve capital obligation. Reserve capital for non-scheduled banks can be at most 5 lakh rupees. Scheduled banks, on the other hand, are required at least 5 lakh rupees and the range goes further from there.

These banks are not entitled to certain benefits that are available to scheduled banks because of their non-scheduled status which hinders them from availing all the perks of being scheduled and supported by the Apec bank (RBI). Among these benefits is enrollment in the clearinghouse, which is an essential tool for easing interbank check (cheque) transactions. Furthermore, the RBI's refinancing facilities-a vital source of liquidity for scheduled banks-are not available to non-scheduled banks.

The approach of Non-Scheduled Bank

• The second schedule of the RBI Act does not include them. It can fulfill all such necessary requirements in order to be considered a scheduled bank.
• They maintain possession of the CRR sum.
• There is more risk associated with these banks.

Scheduled Bank Vs. Non-Scheduled bank

The ability to borrow money to support regular banking operations from the RBI, the central bank, is a major benefit of being a scheduled bank. Under normal circumstances, non-scheduled banks are not eligible for this privilege. They may, nevertheless, petition the RBI for access to emergency credit facilities in the event of extraordinary circumstances.

The requirement that scheduled banks provide the RBI with periodic reports sets them apart even more. The central bank can keep an eye on the state of the financial system thanks to this transparency measure. On the other hand, non-scheduled banks are exempt from filing these reports with the RBI.

Last but not least, clearing houses, which speed up the effective settlement of interbank transactions, allow scheduled banks to become members. Non-scheduled banks are not eligible for this benefit.

Difference Table