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Reserve Bank of India puts 2005 as expiry date on currency notes to curb fake money

Thursday, 23 January 2014 - 6:43am IST | Place: Mumbai | Agency: dna

Post March 31, pre-2005 notes as good as demonitised; Impact on real estate, gold market minimal.

In what is seen as a two-pronged strategy to tackle fake currency notes in the system and black money, the RBI on Wednesday said it will withdraw all currency notes issued before 2005 from April 1, 2014.

“The move is akin to demonetisation and will impact hoarders of cash (black money) and weed out fake currencies to a large extent from the system,” said a board member of a foreign fund.

Most corporates and bankers feel these notes would anyway have been long withdrawn from the system in lieu of new currencies as paper notes do not have such a long life span of 10 years.

The amount held by public as of December 23, 2005, was close to Rs4 trillion, according to RBI data. This amount stands at Rs12 trillion as of December 27, 2013. According to market estimates, 10-15 per cent of notes in circulation are fake notes.

“The RBI would have largely addressed the soiled note issue (currency printed up to 2005), but this move goes beyond the official figures,” said a banker at a foreign-owned bank.

The major reason behind the RBI move appears to be addressing the fake money and currencies that are out of the system (held in cash by individuals/businesses or black money). Most experts from the financial world said fake currencies, especially through neighbouring countries like Pakistan, were corroding the economy apart from cash that were eluding the banking system.

This is a concern for the government as well as RBI alike.

According to RBI spokesperson, the bank wants to bring about uniformity in the notes printed and hence such rationalisations were required. “The RBI has been communicating with banks on the security features of new currency notes for a while now. This move is in a way admitting the vulnerability of duplicating notes issued earlier,” said a managing director at a government bank.

Talks of hawala or illegal money laundering or investment in gold and real estate picking up have also started doing the rounds.

But then bankers and a few senior corporate executives said these weren’t possible now that the RBI has issued an official communique to surrender such notes that do not have the year of issue printed on the reverse of currency notes before 2005.

The RBI has given a body blow to counterfeit notes. However, hoarders of cash are more than likely to employ people and exchange the notes over the next ten weeks or so, at a ten per cent discount, said a financial director at a corporate house.

“Hoarders of cash are rich enough to employ people to get currencies printed before 2005 exchanged through banks,” said a senior banker at a private bank.

People who have notes from 2005 or before identifiable by the absence of any year printed on the bottom, will have to take it to any bank and provide address proof, if you don’t have a bank account.

This will mean that those who have not declared their accumulated cash will now become accountable. If they don’t get it changed.

There is no likelihood of there being any huge cache of such notes because it would have been exchanged for fresh notes in the last ten years. If such notes without any year printed looks crisp and neat it is likely that they are fake. Also it is impossible to change these notes through hawala since such notes have lost value. All avenues of encashing these notes are blocked now.

Yet, the government is likely to mop up substantial amount of black money or make them vanish once and for all, since people who have huge stacks of such cash are likely to surrender them at a discount.

Most of those who have such stash will sell it at a 10% to 15 %discount to a large number of people in small amounts. These individuals will go and get new currency issued.

For example, a black money hoarder will take `3,000 and give `300 as commissions to various individuals for the services. These individuals will get it changed at no risk and make a killing in the process.

Some banks or bank employees may also indulge in such practices to make a quick buck for the extra services.

The long and short of it is that the cash will come back into the system.

The fallout
Black money: The impact is as good as  demonetisation as currencies printed before 2005 will no longer be in circulation. The RBI has given an opportunity to exchange notes through banks only. This means hoarders of cash will automatically come under the lens if they approach banks.

They are likely to employ benami names or front companies to get notes exchanged for new ones at a premium of 10-15 per cent.

Corruption: Bank employees could resort to devious ways to make a quick buck or bail out
customers. Eventually the government and RBI win by giving a body blow to counterfeit notes and hoarders of cash.

Gold & real estate: Unlikely to have an impact as the move is to tackle fake currency. The move discourages cash transactions if currency does not have the year of printing mentioned on the reverse of the note.

All you need to know
What might be RBI’s thinking in phasing out pre-2005 currency notes by March 31?
The RBI has not specified the reasons, but the general perception is that it is keen to rationalise all banknotes in circulation. One theory is that the RBI is aiming to unearth black money held in cash and curb fake or counterfeit currency notes.

How exactly will the new banknotes help?
The post-2005 notes have added security features like machine-readable security thread that fluoresces in yellow on both sides under ultraviolet light; improved intaglio printing; see-through register which ensures half the numeral of each denomination is printed on the obverse (front) and half on the reverse; water-mark and electrotype watermark that can be viewed better when the banknote is held against light; optically variable ink which makes the colour of the numeral appear green when the banknote is held flat but blue when the banknote is held at an angle; dual-coloured optical fibres, seen under ultra-violet lamp; and, of course, year of printing. These features help banks across the world to stay ahead of counterfeiters.

Are notes of only certain denominations being withdrawn?
No. The RBI has advised that after March 31, 2014, it will completely withdraw from circulation all banknotes issued prior to 2005.  At present, currency notes in denominations of Rs5, Rs10, Rs20, Rs50, Rs100, Rs500 and Rs1,000 are issued.

What is the procedure to exchange old notes?
From April 1, people will have to approach banks to exchange pre-2005 notes.

Is this move a cause for worry or panic?
The RBI has appealed to the public not to panic. People are requested to actively cooperate in the currency note withdrawal process.

What will happen if pre-2005 notes are not exchanged for new ones at banks after March 31? Will the pre-2005 currency notes cease to be legal tender?
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. From July 1, 2014, however, to exchange more than 10 pieces of Rs500 and Rs1,000 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. Banks will provide exchange facility for these notes until further communication from the RBI.

Will banks be able to replace all old notes with new ones?
There is not much clarity. Details are awaited.

Will the RBI move lead to excessive workload on banks?
This appears likely. Long queues of people seeking to exchange notes are conceivable.

Will people with loads of old currency notes (euphemism for black money) try to divert them to commodities like gold?
Well, some might. The jury is still out on whether this is a prudent move though.

If gold-sellers accept such old notes, what can they do? 
All such notes will eventually have to find their way to banks, a prospect that not all gold-sellers might relish.

What might be the number & worth of all pre-2005 notes?
As per RBI data, as of December 2005, there were 3,785 crore pieces of banknotes in circulation, worth about Rs4 lakh crore.

—Compiled by Siva Sankar

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