Posted in Finance Articles, Total Reads: 4263
, Published on 15 June 2014
The Reserve Bank of India has recently announced that they intend to withdraw currency notes issued before 2005. In connection to this, RBI announced that plastic notes would be introduced on a trial basis in Kochi, Mysore, Jaipur, Bhubaneswar and Shimla. There are several factors which answers to the question “Why plastic notes should be introduced in India?”
Why such a change?
Polymer banknotes are made from a polymer like bi-axially oriented polypropylene (BOPP). These notes have better security features compared to the traditional paper notes. They also have other advantages in terms of durability and recycling. Polymer substrate is robust and resistant to dirt and moisture which helps in preventing damages. Greater durability implies lesser waste and note printing costs. Polymer notes can be granulated and melted to form polymer note pellets which are raw materials for recycling.
Australia is known to be the first country to fully convert to polymer notes. In 1996, all the currency notes of any denomination in Australia were made of polymer while the paper notes were being withdrawn. Other countries like New Zealand, Canada, and Israel etc. have switched completely to polymer banknotes. The following table summarizes the introduction of polymer notes in several countries.
Year of the first polymer issue
New polymer issues expected?
Recently, Bank of England said that it was considering to switch to polymer notes from cotton paper notes. Based on the study conducted by Bank of England, 87% of the respondents answered in favor of polymer. The bank stated that it would launch plastic banknotes in 2016.
Counterfeit Notes in India
Counterfeiting is a major economic problem, called “the world’s fastest growing crime wave”. The primary reason for RBI to introduce plastic notes is to fight against counterfeit notes.
Counterfeit currency notes detected in the banking system
Notes in circulation (million pieces)
Notes in circulation of higher denomination (Rs.100 & above) (Million pieces)
Counterfeit notes detected (No. Of pieces)
Counterfeit notes per million NIC
Counterfeit notes vis-a-vis per million of higher denominated notes
Source: Estimation of Counterfeit Currency Notes in India – Alternative Methodologies, Sanjoy Bose and Abhiman Das
As seen in the above table, no. of counterfeit notes has increased from 6.7 per million in 2010-11 to 7.51 per million in 2011-12. It has been a growing concern in the recent years and Reserve Bank of India (RBI) has adopted a range of preventive steps for the same. RBI has constantly tried to enhance the security features of the currency as per international anti-counterfeit strategy norms.
RBI conducts programs via media and awareness campaigns so as to enable the public to detect a forged note as well as help achieve systemic checks at the various possible entry points of inducting counterfeit notes. The awareness campaign and educating the public strategy might take longer to create the necessary impact.
An alternative solution to this issue which can be effective as well as less time-consuming is Polymer Banknotes.
Polymer Banknotes – The Answer
According to National Investigation Agency (NIA), it will a very challenging task for RBI to remove or stop the circulation of fake notes. Due to such problems, the economy of the country can face danger. Counterfeit notes adds onto the banknotes which are already printed by the government. With faster printing of money than the growth of real output, the value of money will be reduced which causes inflation. Moreover, governments prefers to print money when they are unable to finance the borrowings they have. Counterfeiting leads to introduction of more fake notes in the system. This effect of inflation thus leads to hyperinflation of the economy which proves to be extremely damaging for the Indian economy.
Thus, the effect of counterfeit notes adds on to the printing of notes and affects the economy in the following ways:
• Inflation in the economy, ceteris paribus
• Decrease in the value of money
• Devaluation of the currency
• Uncertain economic condition discourages investment leading to lower economic growth
Introduction of polymer notes will enable fight counterfeit in India. According to John Sheridan, who leads on counterfeit currency at National Crime Agency, UK, "It is an excellent move and most forward-thinking banks around the world are doing the same," The introduction of polymer notes will make it harder and more expensive for the fakers. Sheridan also states that the fakers cannot get or access real polymer substrate which forces them to produce a substitute material. Even after replicating the material, the fakers face another challenge of printing on plastic. The fakers use commercially available equipment like inkjet printers to produce counterfeit paper notes which will make it more difficult to print on polymer. It will be difficult for the fakers to duplicate security features like metallic strip. Moreover, polymer notes can enable the banknote issuers to bring in new security features like transparent windows.
Polymer notes do cost more to produce than paper-based notes. However, this can be more than made up by their longevity and the reduction in environmental impact costs over time.
Paper currency is considered to be an important medium for the transmission of microbial pathogens in India that are increasingly becoming antibiotic resistant. A recent study has revealed that paper banknotes passing through the hands of vendors, bus conductors, and vegetable sellers in Vellore, Tamil Nadu, had gram positive and gram negative cultures of bacteria such as pseudomonas, klebsiella and E. coli. Disinfection of currency in banks by supersonic or ultraviolet means is one solution to this problem which can be achieved with the help of polymer currency. This will significantly reduce the chances of bacteriological contamination.
Last but not the least, another major reason why RBI is thinking about shifting to polymer notes is to target the money outside the banking system (commonly called black money). According to RBI, notes printed prior to 2005 will be recalled by the end of March, 2014. This would help the government retract some amount of the black money existing in the system. However, since the policy is to recall and not demonetization, reduction of black money will be limited. This is because notes will be swapped without hurdle until the end of March. Black Money holders can easily swap their money by means of gold and other assets purchase. After March, large denomination notes in big chunks will require KYC (know your customer) documentation. This KYC requirement might demonetize a small percentage of notes that have not already been exchanged by that time. Overall, the impact on black money will be small.
Following the practices of the banks in other countries, RBI has definitely taken a bold step to fight counterfeit notes in the country. We need to wait and watch when the polymer notes are fully launched in India.
This article has been authored by Sandipan Datta Debdripta Sengupta from TAPMI
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