Explained: Exchange of damaged notes

A mechanism is in place in banks to exchange all soiled, mutilated or imperfect currency notes for value with essential features intact.
Representational Iamge
Representational IamgeFile/ GK

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 me take you through the focus on clean currency note initiative. 

Actually, the Reserve Bank of India (RBI), under its media awareness campaign, is going to launch a campaign soon on facility for exchange of banknotes at bank branches through FM Radio, Digital Media (websites) and SMS.

In this regard, the RBI has asked the banks for strict compliance of its directions on hassle free exchange of soiled/mutilated notes and coins in line with the regulatory prescription. This time, the apex bank is going to impose a penalty on banks if any laxity in rendering such services is observed.

Before coming to the exact guidelines with regard to the RBI’s clean currency note initiative, let me pick some interesting facts about currency in circulation from the Reserve Bank of India’s (RBI’s) Annual Report for the last financial year ending March 2022. Currently, the Reserve Bank of India issues notes of the denominations – Rs. 2, Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 200, Rs. 500 & Rs. 2000. 

The RBI states that the efforts of RBI remained focused on ensuring an adequate supply of clean banknotes in the economy. The volume of the currency notes in circulation by end of 2021-22, was 13.05 thousand crores, having the value of Rs. 31.06 lakh crores. On the other hand, the total volume of coins in circulation was 12.46 thousand crores at the end of March 2022, having a value of Rs. 27.9 thousand crores. 

Rs. 500 currency notes already have the highest share of the total currency notes in circulation and accounted for 34.9% by end of 2021-22. The total value of Rs. 500 notes in circulation by end of March 2022 were Rs. 22.77 lakh crores. This constitutes 73.3% of the total value of the currency in circulation. 

The share of Rs. 20 notes was 8.4% by the end of 2021-22. Notably, Rs. 10 notes, which form the second-highest volume of currency notes in circulation, have seen a declining share. Their share was recorded at 21.3% by the end of the financial year 2022.

Meanwhile, the share in the value of other high denomination notes of Rs. 2000 currency note continues to fall and was recorded at 13.8% by end of March 2022.

At the time of introduction of these notes in 2016-17 when the demonetization drive was launched, the share in its value was more than 50%. Its circulation too witnessed fall and was just 1.6% to the currency in circulation at the end of March 2022.

It’s also worth mentioning that these notes made up only 13.8 percent of all currency notes in circulation, in value terms, as on March 31, 2022. From 274 crores as at the end of FY20, the number of Rs 2,000 currency notes had fallen to 214 crores at the end of FY22.

It’s also interesting that the currency notes incur a cost on the government in printing. The bigger the value of the note, the lesser the percentage of the cost. For instance, a Rs 100 note costs about Rs 15-17 rupee (15-17% on each tender) in its four-year life cycle, according to a market estimate.

The cycle entails a chain of printing new notes and soiled notes coming back to RBI via commercial banks. The cost of printing a note of 200 rupees is Rs.2.93, printing cost of 500 rupee note is Rs. 2.94 and printing of a 2000 rupee note cost Rs.3.54. 

What are the rules for exchange of damaged currency notes?

A mechanism is in place in banks to exchange all soiled, mutilated or imperfect banknotes for value with essential features intact. The RBI directive already in place envisages that all commercial banks are authorised to accept soiled, imperfect and mutilated banknotes and pay value for these, in terms of the Reserve Bank of India (Note Refund) Rules, 2009.

As per RBI (Note Refund) Rules, 2009, which was amended in 2018, no bank can decline to exchange the damaged, mutilated, taped or torn banknotes. 

So any damaged genuine currency note, be it soiled, mutilated or imperfect can be exchanged by any bank branch or RBI issue office. Co-operative banks and regional rural banks (RRBs) are not eligible to exchange mutilated notes. 

Here it’s worth mentioning that the currency notes with religious or political slogans written on them cease to be legal tender and are not exchangeable. 

What is a soiled currency 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.

In other words, a currency note that gets stained because of its usage and a two-piece tape-pasted currency note that has all essential features intact falls in ‘soiled note’ category. As per the RBI rule, “A note which has become limp or which has developed minor cuts due to wear and tear or which is disfigured by oil, colour, ink, etc. will be treated as a soiled note.”

What is a mutilated currency note?

A currency note having a portion missing is a mutilated note. A note composed of more than two pieces also falls under this category. Mutilated notes are exchanged at designated chest branches of the banks. However, the exchange value of this kind of note depends upon its condition and are exchangeable in accordance with the Note Refund Rules.

What is an imperfect note?

Imperfect note means any currency note, which is wholly or partially, obliterated, shrunk, washed, altered or indecipherable. 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. 

Here, the RBI’s ‘Note Sorting Machines - Authentication and Fitness Sorting Parameters’, a fit note is “a note that is genuine, sufficiently clean to allow its denomination to be readily ascertained and thus suitable for recycling”. An unfit note is one that is not suitable for recycling because of its physical condition or belongs to a series that the central bank has phased out.

Can mutilated or torn notes dispensed from an ATM be exchanged ?

One should not get tense if an ATM dispenses mutilated or torn notes. The RBI has made rules to replace the mutilated old notes from ATMs. As per the rules, the bank cannot refuse to exchange the mutilated notes withdrawn from the ATM. One can easily change it.

The rules envisage that if a bad or fake note comes out from the ATM, then it is the responsibility of the bank. If there is any kind of defect in the note, then it should be examined by the employees of the bank. If the serial number, watermark of Mahatma Gandhi, and the oath of the Governor are visible on the note, then the bank will have to change the note in any case.

However, there is also a fixed limit to exchange notes. According to the rules of the Reserve Bank, a person can get a maximum of 20 notes exchanged at a time.

Also, the total value of these notes should not exceed Rs 5000. However, badly burnt, mutilated notes cannot be exchanged. Such notes can be deposited in the Issue Office of the Reserve Bank only.

(Inputs from RBI website)

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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