According to Prof. Hart, “a bank is one who in the ordinary course of business receives money which he repays by honoring cheques of persons from whom or on whose account he receives it”. Commercial banks constitute the major portion of the country’s credit and banking institutions. In simple term a bank is a dealer in money like a trader in goods.
Commercial Banks in India are organised as joint stock companies and known as banking companies. These banks are primarily classified into Scheduled banks and Non-scheduled banks. Scheduled Banks include nationalized banks, State Bank of India and its subsidiaries, Private sector banks and foreign banks. Non-scheduled banks are those which are not included in the 2nd schedule to RBI Act.
(а) Scheduled Banks
The second schedule of the Reserve Bank of India Act contains a list of Banks which are described as “Scheduled Banks”. A bank in order to be designated as a Scheduled Bank should have a paid up capital and reserves as prescribed by the Act.
In terms of Sec. 42(6) of RBI Act, 1934, the required amount is only Rs. 5.00 lakh. However, presently to start a Commercial Bank, the RBI prescribed a minimum capital of Rs. 100 crore and its business must be managed in a manner hich, in the opinion of Reserve Bank of India, is not detrimental to the interests of its depositors.
The Scheduled Banks are also required to maintain with the Reserve Bank of India a deposit in the form of Cash Reserve Ratio, based on its demand and time liabilities at prescribed rate.
The scheduled banks enjoy several privileges. An account with a scheduled bank carries a greater assurance of safety and prestige value than an account with a Non-scheduled bank. It is entitled to receive refinance facility as applicable. It may also get currency chest facility.
In times of urgent need, it may obtain finance from the Reserve Bank of India to help it tiding over temporary financial difficulties. Furthermore, the settlement of accounts between scheduled banks is facilitated by the use of the “Bankers” clearing House procedure”.
On the other hand, scheduled banks have to submit several returns to the Reserve Bank of India and are obliged to comply with the directions received from the Reserve Bank. Some of these returns have to be submitted in each week usually on Friday.
The affairs of Scheduled Banks are closely watched and largely controlled by the Reserve Bank of India, in order to safeguard the general health of the Banking industry as a whole.
(b) Nationalized Banks
The National:sed banks include the fourteen banks nationalised on 19th July 1969 and the 6 banks nationalised on 15th April 1980. They are also scheduled banks. After nationalisation these banks render various types of functions by assuming social responsibilities.
Through these banks, the government tries to implement its fiscal policies and various welfare schemes. These banks occupy a pivotal place in the Indian Banking system. They are also called public sector banks. State Bank of India and its subsidiaries are also commercial banks providing services similar to that of nationalised banks.
(c) Non-Scheduled Banks
The commercial banks, not included in the Second Schedule of the RBI Act are known as Non-scheduled Banks. They are not entitled to get facilities like refinance and reds- counting of bills, etc. from RBI. They do not get the prestige like Scheduled Banks.
They are mainly engaged in lending money, discounting and collecting bills and various agency services. They insist higher security for loans.
As on December 1999, there was only one non-scheduled bank viz. Sikkim Bank Ltd. is in operation. RBI currently does not encourage the opening of non-scheduled banks. Efforts are on to merge the only non-scheduled bank viz. Sikkim Bank Ltd. with Union Bank of India.