As a harried RBI looks on, the country faces a currency crisis
EVEN as the Government gets busy with the nitty gritty of fiscal policy, citizens face a much simpler but bothersome issue—the shortage of crisp and usable currency notes. The circulation of large volumes of soiled notes is impeding day-to-day transactions, contributing to the mounting pile of complaints in banks and setting the stage for illegal activities.
Crisp currency notes can be exchanged for soiled notes at a price right outside the Reserve Bank of India's (RBI) 25-storeyed, awesome Bombay headquarters. Shops boldly offer to exchange notes and display notices to the effect right next to banks. This, when it is illegal to exchange a currency note for a price less or more than the stated value.
The spiral of reasons creating the deficit is only rising. Continuous inflation causes currency shortage. (As prices rise, more money is needed to pay for the same commodity.) The Government's two note printing presses—at Nasik, Maharashtra, and Dewas, Madhya Pradesh—print around 5,900 million notes annually. But this output is unable to meet the needs. Reliable RBI sources say not more than 35 per cent of the demand for fresh notes—to replace unusable notes that reach the RBI through various banks—is met by the presses.
Secondly, notes of the denominations of Rs 1,000, Rs 5,000 and Rs 10,000, discontinued in 1978, haven't been remonetised. Thus, notes of smaller denominations are being used up to make large payments. Most transactions require smaller amounts, which accentuates the glut of smaller notes. Re 1, Rs 2 and Rs 5 notes make up 33 per cent of the notes, but they account for just 2 per cent of the value of the total currency in circulation. This 33 per cent needs to be replaced the fastest, mostly in six months to two years. Coins, though, last over 20 years. The P.R. Nayak Committee in '88 suggested that Re 1, Rs 2 and Rs 5 notes be totally replaced with coins by '95.This hasn't happened yet.
Typically, the RBI receives non-reissuable (soiled, defaced) notes from various banks, which it is supposed to destroy and replace with freshly-printed ones. But the low manufacturing capacity often compels the apex bank to restaple and recirculate old notes. Which is why you often find soiled notes, torn notes and notes coloured a bright shade of pink after Holi celebrations coming to you straight from your banks. Meanwhile, the RBI loses money spent on manpower in sorting such notes which hardly get reused.
It is mandatory for public sector banks to replace bad notes that any person, whether a customer of that bank or not, brings to any of their branches. But customers often find banks refusing. "This is tantamount to challenging the financial solvency of the Republic as a currency note is a legal tender of the Government of India," says M.R. Pai, vice-president and honorary secretary, Forum of Free Enterprise, referring to the oath printed on the reverse of any currency note. Bankers, however, complain that even the RBI often refuses to replace such notes.
So who's responsible? Under Section 22 of the Reserve Bank of India Act, the RBI has to provide enough currency. And Section 27 makes it mandatory for the RBI to provide reasonably clean notes. In not doing so, says Pai, "the RBI is not performing its self-declared core central banking function: note issue and currency management."
Pai points out the RBI's indifference on other scores. At present, there are 17 differ-ent Re 1 coins floating in the market. There is little emphasis on design—the Rs 5 coin resembles the 50 paise coin despite its thickness and the Rs 2 coin could be easily mistaken for a rupee. The Nayak Committee's suggestion that coins should be easily discernible and light enough to be acceptable has yet to be honoured, especially in the case of the one, two and five rupee coins. There is little pride in the country's currency—no commemoration or honour was bestowed upon it when the Indian rupee turned 150 years old in 1985. And there was the time when a series of Rs 50 and Rs 500 notes were printed before the absence of the national flag on the reverse of the notes was noticed. Alpana Killawala, deputy general manager, press relations division, RBI, springs to the defence: "The RBI is the official issuer and distributor of currency, but it plays only an advisory role for both coins and notes." Also, mints and note presses are owned by the Government, not the RBI.
In '89 the one, two and five rupee notes accounted for 57 per cent of volume and 7 per cent of the value of currency. Coinisation scaled these percentages down to 33 and 2 respectively. The printing of these notes has been stopped, claims Killawala, and fresh demand is being met with coins alone. But it will be a while before the bulk of spoilt notes in circulation come to the RBI and are replaced.
The RBI has commissioned two new note presses at Mysore, Karnataka, and Salboni, West Bengal—to be run by the Bharatiya Reserve Bank Note Mudran Ltd, a fully-owned RBI subsidiary. The first is already operational, the other will be by year-end. At optimal production capacity, expected to be reached by '98, the two presses will produce 9,000 million extra notes. Together, the four presses are tipped to meet the total demand, each eventually looking after the needs of its region. There has also been a substantial increase in the production of five rupee coins. By this April, there were 300 million pieces with the RBI. "This stock should be able to meet demand," states Dr C. Rangarajan, governor, RBI.
As far as notes of Rs 1,000 and above are concerned, the bank has its reservations. Explains Killawala: "Higher denomination notes lead to hoarding." With a parallel economy as big as the official one, a legitimate fear. But given the inflation, the RBI had proposed last year that the Rs 1,000 note be remonetised but there has been no response from the Government.
THE RBI is also trying to encourage non-cash transactions through cheques and electronic fund transfers. To ensure reliability, bouncing of cheques has become a cognisable offence. And consumer courts are settling more such cases in favour of the petitioners. The RBI has also taken steps to counter complaints that shopkeepers and petty businessmen refuse cheques due to the delay in encashment.
Early last year, banks were told to ensure credit in an account on the third day of receiving a cheque against the seven-day period. For further delay, the bank has to credit the account with the prevailing savings account interest. The RBI has made it mandatory for banks to credit the interest. Electronic fund transfer has started between Bombay and Madras. The other two metros will be connected shortly.
Rues Killawala: "While we try to reduce cash transactions, consumers are stubborn about using them." Public sector undertakings also pay their employees in cash. Come festival or marriage time, people's cash consumption shoots up. Killawala adds that every bank is refunded for the soiled notes it brings in, in accordance with the Note Refund rules. Banks, though, are unwilling to conduct non-profitable business of this sort. Consumer complaints have exposed that even note bundles from banks have fewer notes than stated. Ingenious note pilfering has been reported. A note is cut in two and each piece is stuck to a piece of white paper and stapled along with other notes. So one note can be counted as two since you cannot count from the stapled end. Now, the Mysore press will not staple notes in a bundle so as to enable a person to count notes from either side. The plastic band that holds the notes together is non-tamperable and leaves little scope for pilfering.
The constant need to transport currency to the various currency chests (placed with 4,000 branches of different banks as stock for the region) has long been a problem. Says Killawala: "The RBI has to coordinate with the Railways and the state security to get wagons with security." This isn't easy.
Wagons may be booked for more immediate needs like transport of fresh fruits and vegetables. And security personnel may be needed elsewhere. This can delay currency transfer by weeks and create sudden deficit in a certain region. As panic strikes, people start to hoard cash, worsening the situation.
Says N. Krishnan, general manager, agency banking and reconciliation, SBI: "This makes assessment of currency needs of each region crucial." A senior banker says the RBI Is incompetent on this score. On its part, the RBI connected all its 4,000 currency chests on a network system six months ago—improving the monitoring of cash flow among chests. There are other problems. Coins occupy considerable vault space, which the RBI doesn't have. Besides, consumers are often averse to changing to coins. If this is due to indifferent designing, the Government is responsible.
Social activists blame the RBI but it convincingly conjures up physical evidence of progress. If, in practice, the issue is yet to be resolved, both feel it's due to the negligible effort on the part of the victims—the public. The solution lies in people taking initiative and asserting their rights. Money, after all, isn't such a bad thing to fight for.