The Reserve Bank of India is India's national central bank, created by the Reserve Bank of India Act in 1934. The RBI has been fully state-owned since 1949. It is the primary author of the monetary policy of India and executes the policy, in part, through reserve management, intra-bank interest rates and other mechanisms. Like America's Federal Reserve, it is overseen by a board of directors. The head of the committee is called the governor. The overarching banking system consists of two types of banks: scheduled and non-scheduled.
Fractional Reserve Banking
Fractional reserve banking is a system in which banks are required to keep a minimum ratio of funds in reserves, but the banks may lend more money than the sum of its deposits. Say, for example, a bank has $10 million in deposits. If the reserve requirement is 25 percent, the bank may lend up to $7.5 million of the deposits, knowing that the depositors, under normal circumstances, will not need their money all at once, making it possible to lend for a fee. Fractional reserve systems have one or more systems to cope with a mass withdrawal or a "run on the bank." These safeguards are provided by a central bank or system, national monetary policy, intra-bank lending, and deposit insurance.
Criteria for Scheduled Banks
Scheduled banks are Indian banks that comply with the classifications defined in the Second Schedule of the 1934 act. Criteria include paid-up capital, reserves, total value and certification by the RBI ensuring their fiduciary responsibilities to depositors. They include several nationalized banks, the State Bank of India, Regional Rural Banks and scheduled co-operative banks.
Criteria for Non-Scheduled Banks
Non-scheduled banks are depository or lending institutions that do not meet the Second Schedule of Reserve Bank of India Act. These banks may be legal entities, but they do not have procedural endorsement of the government. Non-scheduled banks are not just identified as banks that do not meet the criteria in the Second Schedule of the 1934 Act; they are defined in Section 5, clause C of the Banking Regulation Act of 1949.
Non-scheduled Indian banks may be analogous to non-Federal Reserve banks or non-FDIC insured banks in the United States. Many of these banks are similar to savings and loans, credit unions or co-ops. Though many are organized like a depositor-owned credit union, they are typically for-profit ventures but don't meet government standards and do not have full public confidence.
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