This article on the mechanics of currency management is written by Parthapratim Das pursuing  M.A. in business law from NUJS, Kolkata.

“Currency management essentially relates to planning, designing, issue and withdrawal of currency, ensuring its integrity, availability and the maintenance of quality”.

Background:

The paper currency in India was first issued by the private banks like Bank of Hindustan and the Presidency Banks in the era of East India Company in late 18th century during the British rule. The Paper Currency Act of 1861 brought the monopolistic right to the British Government of India in the field of currency management which ended the power of private banks and presidency banks to issue notes. After introducing the Paper Currency Act,1861, the British Govt. of India authorized the Presidency Banks as agents to circulate and distribute the paper notes throughout the whole British India. Soon circulation and redemption of currency faced a lot of problems due to the vastness of the undivided British India, as a result the British Govt. of India terminated the agreements with the Presidency Banks in 1867 for rearranging the whole currency issuing system for smooth circulation and redemption of currency notes throughout the nation. The Controller of Currency were engaged as the promoting agency and made responsible for the circulation and redemption of the currency. With the assistance of officials and agencies like Mint Masters, Accountant General and the Controller of Currency, the British Government of India arranged the management of the issuance of paper currency. Thus the British Government of India controlled the whole currency management system throughout the span between 1861 to 1935.

The Reserve Bank was initially established in Calcutta on the 1st April 1935 under the provisions of the Reserve Bank of India Act, 1934, enacted by the Parliament of India. It started its operations in full swing and it took over the charges from the Office of the Controller of Currency, Govt. of India and began the functions of issuing currency notes.

Functions of RBI under the provision of the RBI Act.:

As per the section 22 of The RBI Act, 1934 and according to the preamble of the RBI Act, the Reserve Bank is the solitary authorized institution of India for issuance of currency notes in the country and thus it holds a monopolistic status as RBI has the sole right to issue the banknotes of all denominations. As of now, valid paper currency in India exist in the denomination of 5, 10, 20, 50, 100, 500 and 2,000. Recently the paper currency notes of denomination of Rs.1000 have been withdrawn and the denomination of Rs.2000 is introduced. Printing of paper currency of denomination of  Re.1 and Rs.2 have been stopped, though those currency notes are still in circulation and are treated as valid currencies by RBI. As per RBI act,1934, Reserve Bank of India can issue any denomination of currency paper note provided it should not exceed Rs.10,000. The currency note of certain denomination is notified by Government and RBI issues and circulates accordingly. According to RBI Act, circulation and redemption of currency notes are major functions and responsibility of RBI. Coins of all denominations are also distributed and circulated by the Reserve Bank of India though they are issued by the Govt. of India. Coins up to 50 paisa are called “small coins” and coins of Rupee one and above are called “Rupee coins”.The RBI Acts, 1934, assigns the Reserve Bank of India the role to act as a responsible authority of designing, producing, distributing and overall managing the currency of the country.

The Reserve Bank of India, according to the RBI Acts, is responsible not only for providing sufficient quantity of bank currency, but also maintaining the quality and genuinity of currency in circulation throughout the country. The Reserve Bank of India regularly looks into the security related issues and gives attentions to reduce the chances of counterfeiting or forgery of currency. The Reserve Bank of India, from time to time, increases security features of banknotes by enhancing the technology, design and materials of banknotes, in consultation with the Government of India. As for example, Reserve Bank of India introduces Machine-readable security features in currency notes in the year 2005. RBI routinely examines incremental needs, replacement needs and reserve needs of the currency, and takes actions to deal with these issues in accordance with the Government of India. As for example, RBI mechanizes the currency processing in the year 2000 in accordance of the demand of new modern technology.

As per the section 22 of The RBI Act, 1934 ( Right to Issue Bank Notes ) –

“ The Bank shall have the sole right to issue bank notes in India, and may, for a period which shall be fixed by the Central Government on the recommendation of the Central Board, issue currency notes of the Government of India supplied to it by the Central Government, and the provisions of this Act applicable to bank notes shall, unless a contrary intention appears, apply to all currency notes of the Government of India issued either by the Central Government or by the Bank in like manner as if such currency notes were bank notes, and references in this Act to bank notes shall be construed accordingly.”

Infrastructure for Currency Management:

According to section 23 of the RBI Act, the issuance of currency and the general business affairs of the Reserve Bank of India are carried on through two different specialized departments – Issue Department and Banking Department.

The Issue Department is responsible for the total value of the currency notes in circulation and to safely keep the total assets of desired value. This department is liable in issuance of bank notes in exchange of other denominations and against assets and instrumental in the process of getting currency notes or coins from printing presses or mints and distributing currency among public across the country. It is also responsible for withdrawing unfit and improper currency from the circulation.

But the mechanism of doing the above-mentioned activities i.e. placing the required currency into circulation and the withdrawal of currency from circulation are done effectively through the Banking Department of the RBI.

The Objectives of Currency Management are very specific and they are as follows:

• To assure the smooth cash flow by making available sufficient quantity and desirable quality of currency to meet country’s demand.
• To print notes and mint coins from Govt. owned and self-run Note Printing Presses and Mints.
• To distribute and circulate sufficient notes and coins throughout the country by arranging the proper and secured infrastructure.
• To maintain desired quality of notes fit and appropriate for circulation.
• To withdraw unfit and inappropriate notes from circulation and to destroy them and replace them with new currencies without hampering the demand and supply balance of desired quantity of currency.
• To maintain secured and effective processes for accounting.
• To manage foreign exchange efficiently.

The Functions of Department of Currency Management:

The Reserve Bank of India fulfils the above-mentioned objectives and duties through its well organized and efficient department called  Department of Currency Management (DCM). The Department of Currency Management (DCM) is headed by a Chief General Manager. The Department has planning division, resource management and remittance of treasure division, note processing and data analysis division, inspection follow-up division, currency chest division, note exchange division, forged note vigilance cell, security cell, co-ordination and development division,  and administration division. The Department of Currency Management of the Reserve Bank of India makes monetary policies and addresses operational issues and take actions in managing the planning, process of issuance and distribution of currency within the country:

1. To design Currency notes. It recommends designs of bank notes to the Central Government and prints them in accordance.
2. To forecast the demand for Currency notes and coins of the country.
3. To circulate and distribute currency smoothly throughout the nation.
4. To withdraw the dirty, unfit and improper paper notes and uncurrent coins from circulated currency.
5. To ensure the integrity of bank notes.
6. To administer the provisions of RBI ( ‘Notes Refund’ ) Rules, 2009 which deals with the payment of value of the soiled or multilated notes.
7. To rationalize the work procedures of the issue offices on regular basis.
8. To Identify, evaluate and manage the security risks of the issuance, circulation and distribution of currency.
9. To co-ordinate and ensure the protection and safety of the currency management system and assets as a whole.
10. To spread information on matters which are related to currency to the general public as – ‘ The guiding principle for a Central Bank, whatever function or group of functions it performs at any particular moment, is that it should act only in public interest and without regard to profit as a primary consideration’.

The process of movement of currency:

Reserve Bank of India gets new currency notes from four currency note printing presses and gets coins from mints. Among the four currency note printing presses, two currency printing presses are owned by the Security Printing and Minting Corporation of India Limited ( SPMCIL )  which is wholly owned by the  Indian Government which are situated at Nasik, Maharashtra and Dewas, Madhya Pradesh and the other two are run by the Reserve Bank of India and owned by its subsidiary named the Bharatiya Reserve Bank Note Mudran Ltd. ( BRBNML ) which are situated at Mysore in Karnataka and Salboni in West Bengal . There are four mints in India where coins are minted. All mints are owned by the Government of India and they are situated at Mumbai, Hyderabad, Kolkata and Noida. Currency notes move from printing presses to currency chests or from chests to bank branches or vice versa, in specially-built secured trucks accompanied by RBI officials and security. Banks officials are responsible for the movement of the currency from currency chests to bank branches. Currency chest distributes currencies to a particular bank branch to fulfil a specific demand based on the certain business volume created by that particular bank branch in its local business area of operation. Currency flow looks like this –:  Printing Presses→ RBI Offices→ Currency Chests→ Bank Branches→ Public.

The Currency Chest Mechanism:

The Reserve Bank performs the systematic operations, formulates the policies and functions as the authority of currency management of the country through its specific and specialized department called Department of currency management (DCM) which is situated at its Central Office in Mumbai where the Governor sits and 19 Issue Offices situated at all over the country and a sub-office located at Kochi. RBI distributes notes and coins through its authorized selected bank branches. Those bank branches act as chests and called Currency Chests which facilitate the distribution of currency throughout the country. The Currency Chests are actually the extentions of the Issue Department of RBI which provide the availability of the services of Issue Bank at different places to counter the needs of public. Currency chests are storehouses of currency where currency notes and rupee coins are stored by Reseve Bank. Currency Chests required refilling which are drawn from them to maintain the cash balance. Unfit and non-issuable or surplus to the circulation bank notes and rupee coins are deposited into the currency chests. If such types on currency are accumulated sufficiently to the chests, they are transferred to the Issue Department. Bank notes and rupee coins are deposited as well as withdrawn simultaneously in the currency chests on everyday basis to meet the requirement of the bank branch and these types of transactions are called currency transfer transactions. Each deposit of currency to the chest reduces the liability and increases the assets of the Issue Department, on the contrary, each withdrawal increases the liability and decreases the assets of the Issue Department.

Same like the currency chests, there are authorized small coin depots also which are established by a few selected bank branches to stock small coins. Those small coin depots act as the storehouses to reserve the small coins and distribute them to other bank branches throughout the country. Small coins are minted in Government owned mints and issued by Govt. of India. and are distributed by Reserve Bank of India as an authorized agency of the Central Government.

Infrastructure for Distribution and circulation of Currency:

The RBI established Integrated Computerized Currency Operations and Managemeft System (ICCOMS) in Central Office, regional Issue Departments and Currency Chest which consists of three components: Currency Chest Reporting System (CCRS), ICCOMS-Issue Department (ICCOMS-ID) and Currency Management Information System (CMIS). The objectives of this system are:

• Improve operational efficiency;
• Faster and accurate accounting;
• Improve MIS and planning;
• Better monitoring and control;
• Better customer service.

This system provides computerization and network connection of the Currency Chests with the Issue Offices which alleviate prompt and accurate reportings and immediate action and creates a seamless smooth flow of informations between all the offices. It helps to detect problems immediately and accurately and take action accordingly. The scopes of this very modern and integrated system are:

1. Planning for Currency Issue,
2. Allocation and Distribution of Currency,
3. Better Monitoring overall processes from currency stock to distribution to accumulation of currency etc.
4. Infrastructure Planning,
5. Dissemination of live data on currency in circulation

Reserve Bank of India has established a huge network and at present it consisting of 4281 Curency Chests (CCs), 488 repositories and 4044 small coin depots (SCDs) with other banks. Currency chests and coin depots are managed by commercial, cooperative and regional rural banks. State Bank of India manages the highest number of currency chests- 2192. The currency chests and small coin depots are established with Treasuries ( 11 chests) State Bank of India ( 2192 chests and 2118 small coin depots ), six associate banks ( 778 chests and 775 small coin depots ), nationalized banks ( 1124 chests and 1009 small coin depots ) , private sector banks ( 107 chests and 107 small coin depots ),  foreign bank ( 5 chests and 5 small coin depots ), a state cooperative bank ( 1 chest and 1 small coin depot ),  and regional rural bank ( 3 chests and 3 small coin depots ).

More than 64,000 bank branches and more than 43,000 ATMs are engaged in distributing currency to be circulated across the country. Coin Vending Machines are used in banks for distributing coins. For smooth processing of currency 54 high capacity currency verification and processing system (CVPS), 28 currency disintegration and briquetting system (CDBS), 40 desktop note sorting machines are installed and activated across its offices.

The currency chests and high business branches are upgraded with the installation of improved machines like note sorting machines (NSM), desktop note sorters, note counting machines, ATMs, cash recyclers and note detectors which increased the quality of circulation of currency and made it more punctual.

Proportional Reserve System v/s Minimum Reserve System:

As per the RBI Act, the Issue Department should never keep assets less than the liability of it which is the bank notes in circulation. As per the section 33 of Reserve Bank of India Act, 1934 the circulation of currency is endorsed with assets like gold ( in form of coin and bullion ), foreign securities, rupee coin and securities. At first, the assets of the Issue department of Reserve Bank of India must had to consist Gold or securities which might not be less than 2/5th of the total assets, provided a valuation of total Gold would be atleast Rs.40 Crores in any given point of time. Remaining 3/5th of the assets of Issue department of RBI might be rupee coins. This system was known as “Proportional Reserve System”. In 1956, this system has been changed. At present, RBI is required to consist of Gold and Foreign Exchange Reserves of Rs. 200 Crore of which the total valuation of gold reserve should be at least one hundred and fifteen crores of rupees at any given point of time. This system is known as Minimum Reserve System. This system is followed by RBI till date.

As per RBI Act, followings are regarded as eligible assets for the Issue Department:

1. Gold coins and bullions,
2. Foreign securities,
3. Rupee coins,
4. Government securities,
5. Internal bills of exchange and other commercial paper.

Deposits of the currency from circulation or from the printing presses or mints into the currency chests increases the reserves and are admitted in the Cash Reserve Ratio of the Reserve Bank of India. Similarly, withdrawal of currency from the currency chests decreases the reserves and increases the currency in the circulation and increases the liability of the issue department of the Reserve Bank of India. Thus equilibrium of liability and asset get imbalanced due to the currency transfer transactions. When liability of Issue Department pushes up,  it is compensated by the Banking Department through the transfer of required amount of currency to the Issue Department to make up the deficit. On the other hand, when the liability of Issue Department decreases, it is counter balanced by the transfer of bank notes from Issue Department to Banking Department.  

Current scenario:

In spite of increased use of non-cash modes of transactions due to improvement of technology, the demand of the country for currency in circulation for smooth running has increased continuously and proportionately to the constant growth of the Indian economy. To provide good quality and proper banknotes in the circulation, the Reserve Bank of India undertook various effective steps, such as continuous supply of fresh banknotes in sufficient amount, quicker disposal of unfit currency and built up vast mechanized cash processing system. RBI has undertaken different actions according to its ‘Clean Note Policy’ and to counter the threat of fake notes like – (a) creating awareness, (b) raising the security features and (c) introducing improved modern technology to detect counterfeit notes.

Currency in Circulation in the Country:

The total value of currency in circulation was Rs.10,663 billion in the year 2012.

The total volume of currency were 56,549 billion pieces in the year 2010;  64,577 billion pieces in  2011 and 69,382 billion pieces in the year 2012. Coins in circulation were 105,306 billion pieces in 2010; 112,184 billion pieces in 2011 and 78,029 billion pieces in the year of 2012.

Note Refund Rule:

As per section 28, RBI Act, ‘‘Notwithstanding anything contained in any enactment or rule of law to the contrary, no person shall of right be entitled to recover from the Central Government or the Bank, the value of any lost, stolen, mutilated or imperfect currency note, provided that the Bank may, with the previous sanction of the Central Government, prescribe the circumstances in and the conditions and limitations subject to which the value of such currency notes or bank notes may be refunded as of grace and the rules made under this proviso shall be laid on the table of Parliament’’.

Mutilated notes:

The payment of claim against mutilated notes shall be made if the area of single largest undivided piece of the note presented is more than 50 percent of the area of the respective denomination in case of one rupee, two rupees, five rupees and ten rupees note. Full value of the mutilated notes of the denomination of fifty and above shall be payable if the area of the single largest undivided piece of the note presented is more than 65 percent of the area of the respective denomination rounded off to the next complete square centimeter.

‘Clean Note Policy’ of RBI:

RBI adopted the ‘Clean Note Policy’ to make available fair and good quality paper notes in circulation and to withdraw and destroy unfit or soiled paper notes. To achieve the goal set by the policy, 14,987 million pieces of new paper currency notes were printed and distributed for circulation in the financial year of 2009-2010 as compared to 13,809 million pieces of in the financial year of 2008-2009. On the other hand, 13,072 million soiled and unfit paper currency notes, which were 23.1 percent of total circulated paper currency notes, were removed and destroyed simultaneously in the financial year of  2009-2010 as compare to11,962 million disposed off in the financial year of 2008-2009.

The Reserve Bank in accordance with Government of India has been engaged to find out the way to increase the life of currency notes, specifically of the lower denomination which significantly shorter life.

 

Counterfeit or fake banknotes:

Counterfeit or fake banknotes created a huge problem and had a great impact to the Indian economy. In the year of 2008-2009, increased number of counterfeit notes were detected. Out of the total number of detected fake notes, more than 401,000 pieces, which is as much as 86.9 % of the total ceased notes were found at bank branches. The Reserve Bank of India has been working on for long long time to check the menace of counterfeit notes. The Bank took some steps to achieve the goal like:

1. creating awareness through publicity campaigns,
2. enhancing the security features and  
3. introducing improved modern technology to detect counterfeit notes.

Recently made Demonetization  by Government of India  in accordance with RBI, is a big step to counter the menace of counterfeit notes.