Is the RBI helpless in dealing with fake currency notes?

There was another report on July 4 from Lucknow saying that the RBI had filed a case against 20 well known banks for depositing fake currency notes with it. These were valued at over Rs 6 lakh. Mind you, fake notes circulating in posh areas, among the affluent, not the poor. And these are not isolated incidents, nor are they recent phenomena.

It is a strange and yet serious matter that the custodian of currency in India has found no option of dealing with this issue than the courts of law. The courts can certainly penalise the banks if found to be in breach of law, perhaps a failure of due diligence at some level. It appears that the Bangalore incident was indeed a case of lack of diligence.

But apart from issuing legal notices, nothing much is likely to happen. But the question is can the court, even if it penalises these banks for negligence, solve the problem of fake currency in circulation? That will be the responsibility of the Union government and the RBI. Conversely, cannot the banks file a counter case saying that they do not control the currency and if the RBI did its job properly, there would be no fake notes in circulation?  
The Reserve Bank presently manages the currency operations through its 18 Issue Offices located  in various cities. These offices receive fresh banknotes from the banknote printing presses. The Issue offices of RBI send fresh banknote remittances to the designated branches of commercial banks. That being case, the banks could well argue that these notes came from the RBI!

There have been complaints of counterfeit currency for a long time from the public. People have been caught off guard at ATMs dispensing fake currency notes. Since the ATMs are controlled by the banks, the systems they have in place to keep fake notes out of circulation are clearly inadequate. We should welcome any improvements in this area. 
 
Printing and smuggling

There have been reports in the Press that Pakistan has a policy of printing fake Indian currency notes and getting them smuggled into India through Nepal, Bangladesh etc.

Now, with the RBI going to court against scheduled banks, this seems to have reached a new level of helplessness. Is the government abdicating its responsibility to maintain the currency, by asking the RBI to go to court? Does this absolve the RBI of its responsibility to maintain the sanctity of the currency?

The Reserve Bank manages currency in India. The government, on the advice of the Reserve Bank, decides on various denominations of banknotes to be issued. The RBI also co-ordinates with the government in the designing of banknotes, including the security features. The RBI estimates the quantity of banknotes that are likely to be needed denomination-wise and accordingly, places indent with the various printing presses.

In recent years, there has been a shift from cash transactions to those based on electronic funds transfer, like debit and credit cards. Many transactions are conducted using cheques and drafts. This makes it possible for the RBI to consider demonitising high denomination notes, as was done in January 1978. This would make hoards of counterfeit cash useless. The RBI should consider demonitising Rs 500 and Rs 100 notes right away. That will immediately make the counterfeit notes worthless. The issue of identifying such notes, of inadequate due diligence, would also become  unimportant—for a while at least. Those who stash black money in cash would also be hit. The RBI could give people, say about 15 days, to deposit their hoard of demonitised notes in any bank, along with their PAN number, and no questions would be asked, in converting some specified amount, like Rs 1 lakh. This would protect the honest people who for some reason had cash.

The RBI could also consider a new design of currency notes, perhaps using different materials. Many countries do this in a routine way. Technology can be deployed for this purpose. The transition need not take long. This would be a blow against both counterfeit notes and black money.

But it is not likely that the Union government, embroiled in the largest corruption cases this county has known, will ever take such steps. Cosmetic cases in court, which will have no effect, seem to be as far as it is willing to go. We cannot even hope for an improvement in the due diligence procedures.

(The writer was formerly RBI chair professor at ISEC, Bangalore)