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What will RBI do with the old banned notes?

Indian rupee banknote

“Only thing permanent is change!”

Recently, it was announced that the Rs. 500 and Rs. 1,000 notes will no longer be accepted as valid tender. Such notes made up 86% of India’s currency in value terms. As of 28th October, 2016, the total value of currency notes in India was a massive Rs. 17.77 lakh crores – 86% of which is now not valid! Approximately 23 billion bank notes have now “expired”, and will need to be replaced by the RBI. If stacked one on top of the other, the height of such a pile will be 300 times that of the world’s highest peak – Mt. Everest!

An insight into the currency system in India

India is the highest producer and consumer of currency notes in the world, second only to China. 98% of all consumer payments in India are made via cash. Each year, the RBI spends more than Rs. 2,700 crores exclusively on currency production, which is 1.5% of the global bank note industry. In a typical year, the RBI withdraws about 75% of its notes in circulation – which is more than what is collectively produced by all the countries taken together except China.

What will happen to banned notes?

The onus is upon the RBI to ensure that the old notes are disposed off appropriately. The RBI shreds old/soiled/expired notes. For this, the RBI has a mechanism in place called the ‘Currency Verification and Processing System’ (CVPS), which ensures faster and more secured processing of such outdated notes. Each CVPS centre processes upto 60,000 notes an hour, classifying them into ‘fit’ and ‘unfit’. The fit notes are cut in a particular fashion so as to enable them to be recycled into new currency notes. The unfit notes are destroyed, normally via shredding.

After shredding the RBI:

  • Makes briquettes, which are blocks of compressed wastes used as fuel. They are then sold for industrial use through a tender invited by the RBI. Or,
  • Recycles the notes to make files, calendars, tea coasters and souvenirs, or,
  • Disposes them in landfills

The RBI has 27 shredding and briquetting machines spread across its 19 offices.

FYI – according to the RBI, shredding 23 billion notes is no challenge. In 2015-16, 16 billion soiled notes were destroyed.

How much has the RBI already received?

Out of the total currency circulation of Rs. 17.77 lakh crores, Rs. 15 lakh crores was in old notes. Of this, Rs. 6 lakh crores has already been deposited via the banking channels, and the government estimates that another Rs. 4 lakh crores will be deposited.

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