Withdrawal syndrome

Updated: Feb 7 2014, 10:13am hrs
Days after RBI first announced that currency notes of 500 and 1,000 denominations issued prior to 2005 would be withdrawn by the end of this fiscal, it has emerged that the plan was in the works since May 2013 when the Finance Ministry wrote to the central bank asking it to withdraw older series of banknotes in a time-bound mannerthis came after data revealed that as much as 70% of discovered counterfeit currency consists of higher denomination notes of 500 and 1,000.

The currency issued after 2005 is safe for the moment, but in the event of the enhanced security features also falling prey to counterfeiters, RBI and the government would step in once again. Officials involved in the process say more action would be taken to phase out any note series based on reviews and data regarding counterfeiting.

The announcement was greeted with a bit of shock and some scepticism as to what it intended to achieve. After all, the central bank said that all banknotes issued prior to 2005 would be withdrawn from circulation after March 31 this year. From April 1 onwards, all banknotes would have to taken to banks and exchanged for new notes issued after 2005. There was no data that was issued by RBI as to the total value of the banknotes that were to be impacted by the move. The announcement is reported to have led to a secondary market for discounted banknotes issued prior to 2005. Reports suggest people have started approaching jewellers and real estate brokers to exchange large sums of pre-2005 cash.

It was perhaps this nervousness that led RBI to clarify the matter two days later when it said that the rationale behind the move was to remove these banknotes from the market as they have fewer security features compared to banknotes printed after 2005. The statement helpfully added that the volume of the banknotes printed prior to 2005 today, still in circulation, is not significant enough to impact the general public in a large way.

But given that the move had generated some adverse comment and disquiet in the political class, including the BJP, RBI diluted the measure to some extent by announcing that the process of exchanging notes at bank branches could be carried out at convenience. It also said that the old series banknotes can be exchanged even after July 1, 2014 at the bank branches where people hold accounts. However, if a person seeks to exchange more than 10 pieces of 500-rupee and 1,000-rupee notes, at a branch where he or she does not have an account, providing proof of identity and residence would be mandatory. Regardless of all of this, RBI reiterated that the notes printed prior to 2005 will continue to be legal tender.

The timing of the move is interesting. It comes eight months after the Finance Ministry demand and just a couple of weeks after BJP leader Nitin Gadkari invited some journalists to a briefing by the Pune-based Artha Kranti organisation. Among some of their proposals is one to withdraw all high denomination currency. This is not to suggest any sort of link or similarity between RBI currency withdrawal and Artha Krantis radical proposals, including demonetisation, but simply a pointer to the disquiet among all shades of political opinion over high denomination notes and their link with black money.

However, a return of the High Denomination Bank Notes (Demonetisation) Act, 1978a law that phased out notes of 1,000-, 5,000- and 10,000-rupee notesis not under any consideration whatsoever. Higher denomination notes made a comeback in 1998, when the Finance Ministry argued that

reintroducing 1,000-rupee notes was necessary to meet the demand of high-value transactions.

Over the last five years, the central bank, in consultation with the Finance Ministry, has phased out 100-, 500- and 1,000-rupee notes issued in two particular years1996 and 2000. These banknotes are part of the MG Series, whose security features had been successfully breached by counterfeiters and led to a rash of nakli Gandhi as the street tends to call fakes with a picture of the Father of the Nation.

The process for withdrawing 500-rupee notes from the MG Series was initiated in July 2008 and October 2009, while the withdrawal of 1,000-rupee notes happened in March 2011 and that of 100-rupee notes, in February 2012.

In July 2013, the Finance Ministry informed the Standing Committee of Parliament on Finance headed by BJP leader and former finance minister Yashwant Sinha that since 2006 the level of counterfeit currency in the banking system had been going up. For instance, an RBI inspection at the Domariaganj (Uttar Pradesh) branch of the State Bank of India detected 76,108 pieces of counterfeit notes valued at just over Rs 4 crore. What was shocking though is that this translated into 16% of the total number of notes screened in the currency chest of this one branch under question. Such a high level of fakes set the alarm bells ringing across the establishment, especially as this was a case of deliberate and large-scale replacement of currency held in a branch chest, and that too by the bank cashier.

Intelligence agencies have reported that fake Indian currency notes smuggled into India mostly originate from Pakistan, with the distribution network spread from Thailand in the east to the UAE in the west. Dubai, Dhaka, Kathmandu, Colombo and Bangkok are the principle transit hubs. Thailand has emerged as a safe haven for Pakistan based operatives and their associates in the fake currency racket.

The author is a

Delhi-based journalist

Siddharth Zarabi