The Reserve Bank of Indias move to withdraw currency notes issued before 2005 is going to be a major exercise for the banking sector. It will kill two birds with one stone: rationalisation of currency notes with better security features and flushing out of unaccounted money stored in bank and personal lockers. People across the country will have to exchange 36,984 million pieces of notes issued before 2005, which is valued at Rs 3,61,229 crore .
The RBI move
Whats the latest RBI measure involving currency notes
After March 31, 2014, the RBI will completely withdraw from circulation all bank notes (10, 20, 50, 100, 500 and 1,000 rupee notes) issued before 2005.
What's the public supposed to do with notes issued before 2005
If you're holding such notes, you should approach the bank and exchange them for post-2005 notes. From April 1, 2014, you should not accept such notes from others and if you're still holding pre-2005 notes, you will be required to approach the nearest bank branch and exchange them. Banks will provide exchange facility for these notes until further communication.
Does it mean pre-2005 notes won't be accepted after March 31
The RBI has clarified that the notes issued before 2005 will continue to be legal tender. This would mean that banks are required to exchange the notes for their customers as well as for non-customers. The deadline for exchange without curbs is July 01, 2014. After this, to exchange more than 10 pieces of 500 and 1000 notes, non-customers will have to furnish proof of identity and residence to the bank branch in which she/he wants to exchange the notes.
How can you identify notes issued before 2005
You can easily identify the notes to be withdrawn. The notes issued before 2005 do not have the year of printing on the reverse side at the bottom centre.
Why is the RBI withdrawing the notes
RBI Governor Raghuram Rajan has gone on record saying this is not an attempt to demonetise divestment of monetary value the rupee ahead of the general elections. The Reserve Bank says the rationale is to remove these banknotes from the market because they have fewer security features compared to banknotes printed after 2005. It is standard international practice to withdraw old series notes.
How many notes will be impacted by the withdrawal
Going by the RBI's Annual Report for 2004-05, 36,984 million pieces of notes valued at Rs 3,61,229 crore will be impacted as they are issued before 2005. Of this, there are 3,055 million Rs 500 notes valued at Rs1,52,728 crore and 421 million Rs 1,000 notes valued at Rs 42,082 crore issued before 2005. (See table).
Will the RBI or banks ask the source of pre-2005 notes
No. The central bank statement does not indicate banks should follow any new requirement, guideline or rule while accepting cash from customers for exchange.
However, existing rules on depositing and withdrawing cash will remain. For example, if you deposit cash above Rs 50,000 the bank will ask for your PAN card.
Similarly, if you deposit cash above Rs 10 lakh in a month, there's a system generated cash transaction report which will go to Financial Intelligence Unit (FIU) and also the income tax authorities. However, the RBI has assured that even after July 1, 2014, members of public can exchange any number of these old series notes from bank branches where they have their accounts. So you don't need to deposit the cash.
Who should be worried over the withdrawal of notes
People who have a huge amount of black money stashed will find it tough to get them exchanged for post-2005 notes. For example, if you have stashed Rs 10 crore in a bank or personal locker, it will be a Herculean task to sort the notes and get them exchanged. Bankers say around 20 per cent of the high value notes say 1,000 rupee note belongs to the pre-2005 days. So you need to take Rs 2 crore to the bank for exchange which is highly unlikely to happen.
What'll the black money holder finally end up doing
Instead of going to the bank for exchange of notes and get a tax notice, he may buy gold or any foreign currency like dollar through the hawala route. Another possible scenario is that holders of such excess high-value notes could go in for more spending via the cash route. He may also end up approaching an agent who will swap the notes for a commission.
Reserve Bank'S role & actions so far
How is this move different from demonetisation
The latest RBI move is not demonetaisation which is defined as divesting the monetary value of the currency. Here currency notes exist with new features. The higher denomination banknotes of 1,000 and 10,000, which were in circulation were demonetized in January 1946, primarily to curb unaccounted money. These notes 1,000, 5,000 and 10,000 rupee notes were reintroduced in the year 1954, but they were again demonetised in January 1978. Of these, Rs 1,000 note was reintroduced later.
What is the role of the RBI in currency management
The RBI derives its role in currency management from the RBI Act, 1934. The RBI manages currency in India but the government, on advice of the central bank, decides on various denominations of notes to be issued. The Reserve Bank also co-ordinates with the government in the designing of notes, including the security features. The RBI estimates the quantity of notes that are likely to be needed denomination-wise and accordingly, places indent with the various printing presses.
How many notes are in circulation now
There were 4,299 million pieces of 1,000 rupee notes valued at Rs 4,29,900 crore in circulation during the year 2013. This is 36.9 per cent of the total value of notes in circulation. The number of 500 rupee notes were 10,719 million valued at Rs 5,35,900 crore, which is 46 per cent of the value of total notes in circulation. There were 25,168 million 10 rupee notes in circulation with a value of Rs 25,200 crore, according to the Reserve Bank of India.