Value of damaged notes

Facility for exchange of soiled, mutilated, and imperfect notes is to be provided by all banks at their branches
Value of damaged notes

All of us know the importance of money. Money is the way we get the things we need and want. We all want it, work for it and think about it. So, everyone uses money, which is with us in the form of physical denominations of coins and currency notes. It is a commodity which can make someone happy and someone else sad.

Without going into the details of how to make best use of your money, let’s have a look at the importance of clean currency notes. Even as digital transactions are growing at an exponential rate, the use of physical currency notes remains intact in our financial system. Official data points out a jump in digital payments through different modes, including plastic cards, net banking and Unified Payments Interface. UPI of the National Payments Corporation of India (NPCI) is fast emerging as a major medium of payment in the country. However, currency notes in circulation are still in the upward curve although at a slower pace.

Here the Reserve Bank of India’s (RBI’s) latest data is quotable. It reveals that the notes in circulation in value terms soared from Rs 17.74 lakh crore on November 4, 2016, to Rs 29.17 lakh crore on October 29, 2021. The value and volume of banknotes in circulation had increased by 16.8 percent and 7.2 per cent, respectively, during 2020-21 as against an increase of 14.7 per cent and 6.6 per cent, respectively, witnessed during 2019-20.

Meanwhile, retail payment habits of individuals picked in a pilot survey conducted by the RBI in six cities between December 2018 and January 2019, indicates that cash remains the preferred mode of payment and for receiving money for regular expenses. For small value transactions up to Rs 500, cash is used predominantly. Notably, the RBI issues notes in denominations of Rs 2, Rs 5, Rs 10, Rs 20, Rs 50, Rs 100, Rs 200, Rs 500 and Rs 2,000.

The reason for discussing the currency in circulation is to have a look at the currency notes which turn soiled or mutilated over a period of time during their use. Precisely, in today’s column the focus is on soiled, imperfect or mutilated notes, which are non-issuable. The Reserve Bank has been putting concerted efforts to ensure clean currency notes in the hands of the general public. The non-issuable currency notes are replaced by the apex bank with fresh notes. Statistics available reveal that on an average, one out of five currency notes in circulation (over 20 per cent) gets disposed of every year after getting soiled.

How to differentiate a soiled, imperfect and a mutilated note?

The Reserve Bank of India in its clean note policy has issued guidelines to categorise a note. A currency note which has become dirty due to usage is a soiled note. Even a two piece note pasted together wherein both the pieces presented belong to the same note, and forms the entire note, is a soiled note.

Imperfect banknote means any banknote, which is wholly or partially, obliterated, shrunk, washed, altered or indecipherable but does not include a mutilated banknote. A currency note having a portion missing is a mutilated note. A note composed of more than two pieces also falls under this category.

What is the mechanism in banks to exchange these kinds of notes?

A mechanism is in place in banks to exchange all soiled, mutilated or imperfect banknotes for value with essential features intact. As per the RBI directions, the facility for exchange of soiled, mutilated and imperfect notes is to be provided by all banks at their branches. This is a duty that the banking system as a whole owes to the public. There is Reserve Bank of India (Note Refund) Rules, 2009 [As amended by Reserve Bank of India (Note Refund) Amendment Rules, 2018] in place to render note exchange facility to the general public. The Note Refund Rules envisage the procedure required to be followed by the bank branches for acceptance, adjudication, and maintenance of records of non-issuable notes. According to these rules, soiled and imperfect banknotes are exchanged for full value at all bank branches. The value of an imperfect note may be paid for full value / half value under rules as specified for mutilated notes if the matter, which is printed on the note has not become totally illegible and it can be satisfied that it is a genuine note. Mutilated banknotes are exchanged at designated chest branches of the banks. However, the exchange value of this kind of note depends upon its condition. It is pertinent to mention that the damaged notes are accepted over the counter for exchange.

How is the value of a damaged note calculated?

Remarkably, RBI has divided the currency note denomination in two groups for determining the exchange value based on the condition of the note(s). For notes of Re1 to Rs20, if the largest undivided piece is more than 50% of the note area, then full value should be paid to the customer. If the largest undivided piece is less than or equal to 50% of the note area, then the claim would be rejected and the customer will not receive any value.

For currency notes with denomination of Rs50 and above, full value would be paid only if the area of the single largest undivided piece of the note is more than 80%. If this area is less than 80% but more than 40% then the customer can receive 50% value of the note. If the area of the single largest undivided piece of the note is less than 40%, no value would be paid, and the claim will be rejected. In case there are two pieces of the single note, with each having an area equal to or larger than 40%, then the bank is required to pay full value of the note to the customer.

With regard to Rs. 2000 and Rs. 200 notes, the new Reserve Bank of India (Note Refund) Amendment Rules, 2018 stated: “the undivided area of the single largest piece of the note” for a damaged Rs 2000 note must be 88 square cm for a full refund, and 44 square cm for half refund. The Rs 2000 note is 109.56 square cm in dimension. For a damaged Rs 200 note, the criterion is 78 square cm for a full refund, and 39 square cm for half refund.

Can burnt notes be exchanged under the Note Refund Rule?

There are certain categories of notes which cannot be exchanged. For example, such notes which have turned extremely brittle or are badly burnt, charred, inseparably stuck together and therefore cannot withstand further handling or which may lose their original identity with the passage of time cannot be accepted by the branches for exchange. The Reserve Bank advises the holder of such notes to tender them to the In- charge, Issue Department of the Reserve Bank of India under whose jurisdiction the currency chest falls where such notes will be examined under Special Procedure.

Is there any eligibility criterion for seeking exchange of damaged notes?

No. The RBI Note Refund Rule says that the bank branches have to freely accept the notes from any one who wishes to get his/her mutilated notes exchanged from the branch. However, the banks are at liberty to impose a reasonable restriction on the number of the notes to be tendered at a time by an individual tenderer. The banks have also been directed to ensure that the exchange facilities are not cornered by private money changers or professional dealers of defective notes.

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(The views are of the author & not the institution he works for)

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Disclaimer: The views and opinions expressed in this article are the personal opinions of the author. The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK

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