RBIs Currency Withdrawal move on notes before 2005

The Reserve Bank on last Wednesday i.e.22^nd of January,2014 decided to withdraw all currency notes issued prior to 2005, including Rs.500 and Rs.1,000 denominations,  after March 31 in a move apparently aimed at curbing black money and fake currencies.

"After March 31, 2014, it (RBI) will completely withdraw from circulation all bank notes issued prior to 2005. From April 1, 2014, the public will be required to approach banks for exchanging these notes," the RBI said in a statement. (For full notification click / or copy paste this link- http://bit.ly/RBInotesWithdrawalNotification )

The public can easily distinguish the currency notes issued before 2005 as they do not have the year of printing on reverse side. The year of printing in a small font is visible at the middle of the bottom row in notes issued after 2005.

Although the RBI did not give any reason for withdrawal of pre-2005 currency notes, the move is expected to unearth black money held in cash. As the new currency notes have added security features, they would help in curbing the menace of fake currency.

FAQ to help you understand the issue:

Q: Will my currency notes become invalid from April 1?

 

 A: Partly. While you cannot use them for your normal transactions, you will still be able to go to a bank and have them exchanged.  

Q: Till when can I have my notes exchanged at the bank?

A: After July, persons seeking exchange of more than 10 pieces of Rs 500 and Rs 1,000 notes will have to furnish proof of identity and residence to the bank.  

Q: How can I tell whether a note is pre- or post-2005?

A: All notes printed after 2005 have the year printed in the middle of the bottom row. Pre-2005 notes do not have this feature.

 

Q: Why did RBI decide only on 2005 as the cutoff year?

 A: Notes issued since 2005 have a different design and colour and this will bring uniformity to the cash system. They also have more security features to tell apart from fakes such as added watermark, etc. These notes are thus better in fighting the counterfeit currency menace.  

Q: In what denominations do pre-2005 notes exist?

A: Pre-2005 notes in all current denominations -- from Rs 5 to Rs 1,000 -- are in circulation. Please note, it should not be mis-understood that only Rs.500 and Rs.1000 notes be exchanged. 

Q: What will RBI do to the pre-2005 notes withdrawn from the system?

A: Central banks typically destroy withdraw currency notes by shredding them.  

Q: What is the motive behind the RBI move?

A: While the central bank has not given an explanation, it is said the move is fight the counterfeit-currencies issue as well as to flush out black money from before 2005 that could still be held in cash.  

Q: What is the average lifespan of currency notes?

A: There is no official declaration on this. In the US, the estimated lifespan of a currency tender ranges from about six years for the USD 1 bill to 15 years for the USD 100 bill, according to the Federal Reserve website.

Q: Will the bank ask for PAN no.?

A: From now to July 1, you can exchange any number of notes with a bank, without any fear.

There is a rule that transactions above Rs.50,000 need a PAN verification, but we aren’t yet sure if that applies to the changing of notes.And you don’t have to go to your bank. You can go to any bank, and they will change your notes, for free.

Also note: After July 1, banks can ask for a proof of identity and residence if you want to exchange more than 10 notes. An aadhaar card should work for both cases. You aren’t required to give a PAN card.

How Much Pre-2005 Currency Notes Are There?

Here’s the “Notes in Circulation” from the RBI data:

This means about 3.4 trillion (343,700 crores) is “suspect”. Around half of this would have been churned back over the years, replaced normally. So in effect, this affects notes worth about 200,000 cr. (2 trillion) which is a fairly large chunk of money. The RBI needs to be prepared to replace that much.

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.

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.

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.( For details click here- “New Security Features in Indian Rupee from 2005 RBI”( http://bit.ly/2005RupeeFeatures ))

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.

The Result-
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.

My Take-

Don’t panic at all, most of us will not have to worry, yes there may be one or few commotion and mischevious moments, buy nothing else and that, though there are more questions on this move, yet the result is for better.