It's more about potential - you sit a Music Aptitude Test, aural tests and performance of 2 pieces with optional sight reading, plus a chat about what kind of music you enjoy.
DD has never taken a single exam in her main study. At the time she sat the test she was probably around G6 level in that and G1 in the other two. That's probably higher than the vast majority, DD reckons most of her friends on full scholarships were more like G3.
You don't need to be a classical performer (DD is not and we found a lot of schools were only really interested in classical music and orchestral instruments), and you don't need a sheaf of certificates or a working knowledge of composers. You also can't prep for the MAT (afaik).
You probably do need to be pretty interested in music rather than just being there because you've had piano lessons and thought you'd give it a go. You definitely don't need to be set on a career in that area either.
It's also not the case that they just use it to select via the back door. DD has severe dyslexia and while she's bright, I very much doubt she's going to be one of the kids with top grades in everything, and given we stated the SEN on the application for access arrangements in the tests, there was always the risk of being weeded out (one school did tell us that while they were very interested in her musically they couldn't meet her needs on that front).
Same with the sports scholarships - they're not assessing for academics there either.
Once you have a place at the school you can also apply for maths and art scholarships.
What the scholarships do ensure is very strong music and sports departments (especially as you have to take the relevant GCSE) - if you took those away and just had a system based on local entry, you'd be unlikely to have such large cohorts for GCSE and therefore smaller departments and a far smaller offer in terms of extra curricular activities for all (you don't have to be a scholar to be in the teams/bands/orchestras/choirs etc).