Difference between Scheduled and Non Scheduled Banks

The banking sector is an important dimension of the Indian Economy. There are various aspects to its evolution and nationalization in the post-independence era. With liberalization and privatization, the banking sector has seen tremendous growth, immensely contributing to the service sector of the economy.

Why are scheduled and non-scheduled banks in the news?

Recently, the Reserve Bank of India (RBI) has issued a licence for payment banks to operate as financial entities, as per its guidelines. The inclusion of Fino Payments Bank as a private sector scheduled bank has been in the news.

In this article, we shall be discussing various aspects of scheduled commercial banks in India.

Further, this article covers other important dimensions, keeping in mind the demands of the preliminary as well as the main examination of the UPSC IAS Exam.

What are Scheduled Banks?

  • By definition, any bank which is listed in the 2nd schedule of the Reserve Bank of India Act, 1934 is considered a scheduled bank. 
  • The Schedule consists of those banks which satisfy various parameters, criteria under clause 42 of this act.
  • The list includes the State Bank of India and its subsidiaries (like State Bank of Travancore), all nationalised banks (Bank of Baroda, Bank of India etc), regional rural banks (RRBs), foreign banks (HSBC Holdings Plc, Citibank NA) and some co-operative banks. 
  • These also include private sector banks, both classified as old (Karur Vysya Bank) and new (HDFC Bank Ltd).
  • To qualify as a scheduled bank, the paid-up capital and collected funds of the bank must not be less than Rs5 lakh. 
  • Scheduled banks are eligible for loans from the Reserve Bank of India at bank rate, and are given membership to clearing-houses.

What are Non-Scheduled Banks?

  • Non-scheduled banks by definition are those which are not listed in the 2nd schedule of the RBI act, 1934.
  • They don’t conform to all the criteria under clause 42, but dully follow specific guidelines as laid down by RBI.
  • Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled banks.
  • Unlike scheduled banks, they are not entitled to borrow from the RBI for normal banking purposes, except, in an emergency or abnormal circumstances.
  • Bangalore City Co-operative Bank Ltd. Bangalore, Baroda City Co-op. Bank Limited are a few examples.

What are the figures of scheduled banks as per RBI?

As per the latest data released by the RBI, the following are the number of scheduled banks in our country:

  • Scheduled Public Sector Banks – 12
  • Scheduled Private Sector Banks – 22
  • Scheduled Small Finance Banks – 11
  • Scheduled Payments Banks – 3
  • Scheduled Regional Rural Banks – 43
  • Scheduled Foreign Banks in India – 46

Commercial Banks

  • According to the RBI, “Commercial Banks refer to both scheduled and non-scheduled commercial banks which are regulated under Banking Regulation Act, 1949.” 
  • Commercial banks operate on a ‘for-profit’ basis. 
  • They primarily engage in the acceptance of deposits and extend loans to the public, businesses and the government.
  •  Nowadays, some commercial banks are also providing housing loans on a long-term basis to individuals.

Types of Commercial Banks

  • Commercial banks are of three types- 
    • Public sector Banks
    • Private sector Banks
    • Foreign Banks.

 Public Sector Banks

  • Public Sector Banks (PSBs) are banks where a common stake (i.e. more than 50%) is held by a government. 
  • The shares of these banks are listed on stock exchanges.
  •  Example-  State Bank of India, Corporation Bank, Bank of Baroda, Punjab National Bank, Canara Bank, Bank of India.

Read about similar topics related to public sector from the links provided below:

Private Sectors Banks

  • In the case of private sector banks, the majority of the share capital of the Bank is held by private individuals. 
  • These Banks are registered as companies with limited liability. 
  • Example- ICICI Bank Ltd, ING Vysya Bank.

Get an answer to ⇒ What is the largest private bank of India?

Foreign Banks

  • These banks are registered and have their headquarters in a foreign country but operate their branches in our country. 
  • Some foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank.
  • The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

Also read⇒ Types of Banks in India

Co-operative Societies Offering Banking Services

  • Cooperative societies are an important constituent of the Indian financial system, operating both in urban and non-urban areas.
  • All banks registered under the Cooperative Societies Act, 1912 are considered Co-operative Banking Societies.
  • These are cooperative societies/ institutions  run by an elected managing committee with provisions of members’ rights and a set of “communally developed and approved by-laws and amendments.”
  • In the urban centres, they mainly finance entrepreneurs, small businesses, industries, self-employment and cater to home buying and educational loans. 
  • In rural areas, such institutions primarily cater to agricultural-based activities, which include farming, livestock, dairies and hatcheries etc. 
  • They also extend loans to small scale units, cottage industries, and self-employment activities like artisanship.
  • Unlike commercial banks, which are driven by profit, cooperative banks work on a “no profit, no loss” basis. 
  • These are regulated by the Reserve Bank of India under the Banking Regulation Act, 1949 and Banking Laws (Application to Co-operative Societies) Act, 1965
  • However, RBI has issued guidelines, emphatically stating that post amendment in the Banking Regulation Act, 1949, effective September 29, 2020, co-operative societies cannot use the words “bank”, “banker” or “banking” as part of their names, except as permitted under the provisions or by the Reserve Bank of India (RBI).
  • Insurance cover from Deposit Insurance and Credit Guarantee Corporation (DICGC) is also not available for deposits placed with these societies.

Interested candidates can read about the Cooperative Movement in India & the Ministry of Cooperation from the linked article.

Regional Rural Banks

  • Regional Rural Banks or RRBs, simply put, serve the rural areas and agricultural sectors with basic banking and adequate financial services. 
  • They were set up in 1975, based on the recommendations of a committee.
  •  Based in Moradabad, Prathama Bank, established on 2 October 1975, is the first RRB to open in India. It was sponsored by Syndicate Bank. 
  • The RRBs are owned by the central government (50%), the state government (15%) and the sponsor bank (35%). 
  • Several commercial banks have sponsored RRBs. Prominent examples include the Maharashtra Gramin Bank (sponsored by the Bank of Maharashtra) and the Himachal Gramin Bank (sponsored by Punjab National Bank). 
  • RRBs were set up to eliminate other unorganized financial institutions like moneylenders and supplement the efforts of cooperative banks.

Learn about the National Bank for Agriculture and Rural Development (NABARD) that supervises RRBs in the linked post.

Development Banks

  • A Development Bank is an all-purpose institution giving a new shape to economic development patterns and accelerating the activities of all branches of the economy and creating healthy financial and socio-economic infrastructure.
  • They are engaged in the task of planning, promoting and developing industries in every sector of the national economy.
  • The objectives of  Development Banks may be enumerated as speeding up economic growth, rapid industrialization, rural development, support to industry, entrepreneurial development, project finance, refinance, development of backward areas, housing.
  • Business often requires medium and long-term capital for the purchase of machinery and equipment, for using the latest technology, or for expansion and modernization.
  • Examples – IFCI LTD, IDBI, IIBI, SIDBI.

Learn about ⇒ Small Industries Development Bank of India (SIDBI)

Conclusion

The banking sector is one of the crucial pivots of the Indian economy, seamlessly integrating rural and urban development, credit and financing for all major purposes. With the challenges of Non-Performing Assets (NPAs)  and several structural bottlenecks, the role of RBI in overseeing the institutional functioning for better efficiency and transparency is important. As the economy progresses more rapidly to catch up with the expected pace post-COVID-19, there is an increasing focus on indigenization and technological advancements.

Moreover, in an expanding global business landscape, India being one of the largest markets, it must streamline and address these challenges forthwith to take advantage of the change.

On the domestic front, the security, safety and interest of the small investors, depositors with local banking institutions have to be protected, provided challenges enumerated by the RBI across several quarterly briefs. It is high time, the challenges in this sector are addressed, to realize the true potential of an Atmanirbhar Bharat.

This article is relevant for the sections of Economy and Current Affairs part of the UPSC Syllabus prescribed for Preliminary and Main Stages of Civil Services Exam.

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