Currency recalls in a note folding economy

23 Mar

The Reserve Bank of India issued a notice to recall currency notes prior to 2005 in an effort to curb black money in the country. It first issued a notice in January 2014 on modalities of the recall. Then it extended the deadline for recall till January 01st, 2015.

While the intent and rationale behind the recall is very good, recall of notes based on the year of issuance of currency notes has potential to be a pain in the long run. The reason? It is the way RBI prints the year on the currency.

Note that India has lot of cash flow in its economy in the form of notes exchange (as opposed to card or cheque transactions in lot of countries.) Most transactions happen in rural and neighborhood micro economies (as opposed to franchise driven stores.) Most people have wallets in which notes are folded. The currency in small economy stores also is kept in folded form.

Now, lets take a look at how RBI prints the year on currency notes. The year is printed in small font, spreading on either side of the fold in the middle , closer to the bottom edge of the note, and more importantly, on the outer side of the note when folded. Due to this, the area at which the year is printed goes thru lot of rupture during transactions.

Just to validate this thought process, I skimmed around for notes with low readability of the date. I did this among a pool of about Rs 2000 of the cash I have and bingo, I could find two notes each in four low end denominations of the currency. As a bonus, I could find notes that are printed either in 2010 or 2011, that means these notes are 3-4 years in transaction at the most.

Here is a Rs 10 note printed in 2010. See the year in lower middle section of the note and you realize how soiled the area is within 3-4 years of use.

Here is a Rs 10 note printed in 2011.

Here is a Rs 20 note printed in 2010. The date is barely legible.

Here is a Rs 20 note printed in 2011. The date is barely legible here too.

Here is a Rs 50 note printed in 2010.

Here is a Rs 50 note printed in 2011.

Here is a Rs 100 note printed in 2010.

Here is a Rs 100 note printed in 2011.

Going by the above images, we know how difficult it is for rural and small sized economies to use the printed date as a way to enforce the life of currency notes. One consoling factor might be (at least temporarily) that RBI started printing year on the currency notes starting in 2005. So for now, people can use any note with a year printed on it in their transactions. But a year or two down the line, we might have challenges enforcing the rule, if the starting year is different from 2005.

What should RBI ideally do? Here is my take. RBI should start printing the year on the currency notes at a different place (say, somewhere close to the watermark) and with a larger font. The year should be legible in low light conditions and on notes that are heavily used/soiled. Once RBI delivers notes with new standards for a year or two, enforcement becomes easier, because the instrument for enforcement would be more apt.

Enforcing the recall in the current standards of notes (and printed year) would lead to more confusion, especially in poor and uneducated sector. Note that India is one of the countries that uses currencies of different sizes and colors, given the low literacy rates. So enforcement of age of notes should be thought thru more carefully, with strong consideration towards challenges in rural, poor and uneducated sectors.

Better yet, RBI should find more ways to encourage transactions that are trackable – card and cheque transactions. Now-a-days, these kind of transactions are time consuming, come with lot of direct/indirect charges, and in general perceived as an inconvenience. Any innovations in encouraging these transactions would help the economy a lot.

Hope RBI comes up with a better way out of this situation.

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