Scheduled Banks

Scheduled banks are banks that a central bank has placed on a list, or "schedule", that it is required to keep under its founding law. The term is used mainly in South Asia. In Pakistan a scheduled bank is a bank on the list the State Bank of Pakistan (SBP) maintains under section 37 of the State Bank of Pakistan Act 1956. In India it is a bank included in the Second Schedule to the Reserve Bank of India Act 1934. Being on the list gives a bank access to central bank facilities and, in return, subjects it to the central bank's reserve, reporting and supervisory rules.

The idea comes from the Reserve Bank of India Act 1934, passed in British India. When the SBP replaced the Reserve Bank of India in Pakistan in 1948, the concept was carried into Pakistani law and later written into the SBP Act 1956. Bangladesh uses the same term. Most other countries simply speak of licensed or authorised banks. The scheduled label is about a bank's relationship with the central bank; the licence to carry on banking is a separate step, granted under banking-companies legislation.

Picture a members' list kept at the door of a wholesale market. Anyone can open a shop in town, but only traders whose names are on the list can walk in, buy wholesale, borrow from the market's own credit desk and use its delivery service. In exchange, listed traders must keep a deposit with the market, open their books for checks and follow its house rules.

A central bank's schedule works like that list. A bank whose name is on it can deal directly with the central bank: borrow from it, settle payments through it and take part in the markets it runs. In return, the bank must keep part of its money with the central bank, send in regular reports and accept inspection. A bank not on the list has to go through a listed one.

Section 1 of the State Bank of Pakistan Act 1956 defines a scheduled bank as a bank for the time being included in the list maintained under section 37(1). Section 37(2) requires the SBP to declare, by notification in the official Gazette, any bank carrying on the business of banking in Pakistan that meets the Act's conditions to be a scheduled bank. Clause (a) of that sub-section covers banking companies, cooperative banks and certain other incorporated banks. The SBP uses this power when a new bank starts operating or an existing bank is restructured; in 2015, for example, it issued a notification under clause (a) declaring MCB Bank Limited a scheduled bank.

The SBP's statistics are built around this list. Its tables on deposits, advances and investments are headed "scheduled banks", and its statistical notes have listed specialised lenders such as Zarai Taraqiati Bank among the scheduled banks alongside commercial banks. Scheduled banks are the institutions that keep cash reserves with the SBP, use its repo facility and reverse repo windows, bid in auctions of market treasury bills (MTBs) and Pakistan Investment Bonds (PIBs), and lend to each other in the interbank market priced off KIBOR.

In India, section 42(6)(a) of the Reserve Bank of India Act 1934 directs the Reserve Bank to include in the Second Schedule any bank whose paid-up capital and reserves together are worth at least five lakh rupees and which satisfies the Reserve Bank that its affairs are not being conducted in a way that harms depositors. Section 42(6)(b) provides for a bank to be removed if it falls below these conditions. The threshold was set long ago and is low by modern standards; in practice, licensing rules under the Banking Regulation Act 1949 now set much higher entry capital.

Section 42(1) requires every scheduled bank to keep a cash reserve with the Reserve Bank, the cash reserve ratio, which works as a reserve requirement. Indian statistics separate scheduled commercial banks, scheduled cooperative banks and regional rural banks from non-scheduled banks, which are usually small cooperative lenders.

Although the wording differs, scheduled status brings similar rights and duties in each country:

• Access to central bank credit. Scheduled banks can borrow from the central bank against eligible collateral, which makes the central bank their lender of last resort.
• Reserve and liquidity duties. They must keep cash balances with the central bank and meet liquidity ratios set by it.
• Reporting. They file regular returns on bank deposits, advances and investments, which become the headline banking statistics and feed measures such as broad money (M2).
• Market access. They take part directly in government securities auctions, open market operations and the interbank market whose overnight rate is the call money rate.
• Payments. They settle through the central bank's real-time gross settlement (RTGS) system and clearing arrangements.

Scheduled banks make up the core of the banking system in Pakistan and India, but not all of it. Non-bank lenders, microfinance institutions and shadow banking entities sit outside the schedule even when they lend or take deposits under other licences. Being scheduled is not a guarantee of soundness: scheduled banks still have to meet bank capital rules and manage non-performing loans, and some have failed or been merged under central bank direction. Elsewhere, the closest equivalents are the US idea of a Federal Reserve member bank or a state chartered bank, and the authorised deposit-takers listed by regulators in the UK and other countries. For an overview of the institutions that keep such lists, see the list of central banks of the world and central banks.

• State Bank of Pakistan Act 1956
• Reserve Bank of India