K C Chakrabarty: Currency management in India - issues and challenges
Keynote address by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at
the Banknote Conference 2014, Washington DC, 8 April 2014.
* * *
The assistance provided by Shri B. P. Vijayendra, Ms. Kaya Tripathi and Shri Arvind Kumar is gratefully
acknowledged.
1. Mr. Tom Ferguson, Chairman, Banknote Conference 2014; Mr. Tim Vigotsky, Director,
Banknote Conference 2014, my fellow speakers - Mr. Barna Barabas, DMD, Jura Security
Printing Alliance; Dr. Wolfram Seidemann, Managing Director, Louisenthal; other delegates;
ladies & gentlemen. At the outset, I thank the organizers of Banknote Conference 2014 for
inviting me to speak at this august gathering. From the contents of the Conference Schedule
and from the feedback that I have received from my colleagues in the Reserve Bank of India,
who have participated in this Conference over the years, I gather that the Conference seeks
to serve certain useful purposes, notably, providing a platform for a free and frank exchange
of views, showcasing the latest developments in the rapidly changing field of currency
management, bringing together the service providers and the service seekers from across
the world under one roof and generally helping the participants to chalk out their future
strategies and plans of action.
2. Because of the sheer size of our population and the quantum of banknotes that we are
required to put into circulation every year, India has emerged as one of the biggest
consumers of the ingredients that go into production of banknotes in the world. In keeping
with the magnitude of the banknotes that are put into circulation, the corresponding need to
import other machinery for processing, detection and destruction of the bank notes is also
humongous. Thus, India is a very significant market for the suppliers of all ingredients and
equipments, which form the entire ecosystem of the banknote production and destruction
process. As in-charge of the currency management function in the country, we at the
Reserve Bank of India, the Central Bank of the country, have experienced severe
constraints, some of which can be traced, directly or indirectly to the operations of the global
suppliers and vendors in the banknote industry. I intend to use the presence of these global
suppliers and vendors and the opportunity to speak at this platform today to highlight some of
these concerns, which I feel must be bothering other Central Banks which rely on imports for
their currency management, especially in the emerging markets. I would be extremely happy
if the suppliers /vendors could reflect on our concerns and develop some practical solutions
to our problems. However, before I get into the specific issues, let me begin with a brief
perspective on various dimensions of the Indian currency system and the issues and
challenges that we face in our currency management efforts. I would also like to share some
of the recent steps we have taken in this area with a view to seeking your views and
feedback for improvements.
Introduction
3. Currency management has a great degree of significance for Central Banks the world over
as it is one of the most visible functions which touches the lives of every individual. Since
people often tend to judge the efficacy of the central bank from the ease of continuous
access and quality of notes in their possession, currency management function entails a
certain degree of reputational risk for the central bank. As is the case in most jurisdictions,
issue of banknotes and management of currency is one of the core functions of the Reserve
Bank of India. It is enshrined in the preamble to the RBI Act, 1934 as "...to regulate the issue
of Bank Notes and keeping of reserves with a view to securing monetary stability in India and
generally to operate the currency and credit system of the country to its advantage."
4. The mandate of any central bank is to protect the integrity of banknotes through new
design and security features, estimate the demand for banknotes and coins, plan the supply
and distribution of adequate quantity of banknotes and coins and ensure quality of banknotes
in circulation by timely withdrawal of soiled banknotes. It is equally important to maintain
confidence in currency through improvement in systems / procedures and by raising public
awareness by enlisting support from all associated with the design, production and supply of
banknotes.
Some numbers
5. There has been a steady increase in the demand for banknotes and coins over the years,
despite the increased use of technology-driven non-cash modes of
payments/ecurrency/virtual currency-bit coins, etc. Even internationally, notes in circulation have been
increasing despite the use of non-cash modes of payment. However, the large numbers in
India present a unique situation as compared to other countries. A comparative picture of the
Notes in Circulation (NIC) in India as compared to some major countries is indicated in the
table given below:
6. Globally, the cash in circulation to GDP ratio has ranged from 2.5% to 8% whereas in India
it has been around 13% due to the predominant usage of cash by a majority of the
population. The world-wide growth rates of cash in circulation has varied between 6% and
13%, with Central & South America figuring at the top end followed by Africa (12%), Middle
East (11%), Europe (10%), Asia (7%) and finally UK and Ireland at 6%. In the year 2013,
154 billion banknotes were issued globally, of which the maximum banknotes, 54 billion,
were issued by China and almost 20 billion banknotes by India. The global projections for the
next three years have been worked out at 160 billion, 166 billion and 173 billion banknotes,
respectively. These numbers are simply astounding. While it presents a massive opportunity
for the vendors associated with the production of banknotes, I believe it simultaneously
enjoins upon them certain responsibilities. For instance, the vendors need to be conscious of
the impact of their activities on the environment. I will touch upon some of these issues later
in my address. At this stage, I would like to mention that there needs to be more investment
in research and development efforts by the vendors to ensure that the longevity of the
banknotes improves and eventually, the cost of printing of banknotes for the society as a
whole comes down. Vendors need to develop such banknote paper that can resist dirt and
moisture, thereby increasing the life and quality of the banknotes in circulation. But while the
focus needs to be on bringing down the cost of printing banknotes, it cannot be done by
compromising on security. In fact, effort has to be on making the banknotes more secure with
lesser, but stronger security features.
Currency management in India- major challenges
7. Let me now share with you some of the challenges that we encounter in currency
management and currency distribution in India. In a country like India having an area of
approximately 3.3 mn sq. km. and a population of more than 1.2 billion, reaching the
currency to the end users in far flung areas dotted with difficult terrains, poses an enormous
challenge. As on December 31, 2013, there is a network of 110,520 commercial bank
branches and 137,080 ATMs. The notes in circulation as on the same date was
approximately 76.47 billion pieces valued at 12, 468 billon while the coins in circulation were
around 89.91 billion pieces valued at 168 billion. As the demand for notes and coins is
subject to diverse socio-economic, behavioural and other often unpredictable factors, the
task of forecasting demand for currency is a challenging task and can be subject to large
variations. At present, the system poses considerable difficulties in capturing the structural
and cyclical demands for currency and projecting demand with precision. I would, therefore,
also take this opportunity to extend an invitation to the delegates present here to come
forward and see if they can work with us for making accurate projections for the demand of
banknotes and coins.
8. The other challenges in currency management relates to ensuring durability of banknotes,
ensuring adequate supply of all denominations, improving operational efficiency in
distribution of notes by controlling cost of handling, distribution and security in transit/storage,
providing last mile connectivity at reasonable cost, ensuring equity in distribution and
repositioning RBI as an upstream facilitator in the fresh note/coin supply chain, rather than as
a retailer with limited reach. Let me highlight the challenge associated with durability of the
banknotes in India by giving some figures. We in India, withdraw more number of banknotes
from circulation than the number of banknotes collectively produced by all countries taken
together with the exception of China. In fact, we are constrained to withdraw over 75% of all
notes that we circulate every year as may be seen from the table below:
9. Such massive withdrawal of banknotes from circulation not only means additional cost for
printing of fresh notes but also additional requirement of various resources used in
production of banknotes. In this context, it becomes imperative that efforts are made to
enhance the durability of the banknotes so that not only the wastages are reduced, but also
resources are utilized in a sustainable manner, thereby ensuring that the environmental
footprint of our currency management operations is minimized.
10. Mechanization of soiled note processing while augmenting capacity has also thrown up
new challenges like ensuring standardization of machine parameters, slow progress in
improvement in processing capacity by commercial banks and security risks on account of
manual intervention. Another challenge with the likely potential to evolve into a reputational
risk for RBI is the shortage/ "perceived" shortage of coins and the lack of understanding on
the exact role of the central bank in its distribution. It needs to be understood that while the
responsibility for issue of coins is that of the Government of India (GoI), RBI's role is
restricted to putting into circulation the coins received by it. Then, there are issues arising out
of similar shapes and sizes of coins of different denominations. Last, but not the least, is the
growing menace of forged notes in circulation and creating public awareness about various
aspects of banknotes.
Recent measures in India
a) Constitution of high level committee
11. To address the significant challenges faced by us in India and other related issues, a
High Level Committee was recently constituted by GoI (Chairman: Dr. K. C. Chakrabarty)
having members representing GoI, RBI, Note Presses & Mints. The Committee reviewed the
forecasting methodology and studied the international best practices in cash distribution by
other Central Banks. It made wide-ranging recommendations, notably, (i) RBI to focus
exclusively on management and planning of currency system while passing on the
responsibility for distribution of banknotes and coins entirely to commercial banks, (ii) need to
introduce private entrepreneurs for distribution of banknotes and coins on behalf of banks, if
last mile connectivity for distribution has to be achieved, (iii) identification of a bank willing to
assume leadership of currency management function in the district, etc. All these
recommendations have been accepted and are at various stages of implementation.
b) Distribution mechanism
12. The functions relating to issuance of currency (both banknotes and coins) and their
management is performed by the Reserve Bank through its 19 issue offices and a network of
4,209 Currency Chests and 3,966 Small Coin Depots spread across the country. Despite the
large number of currency chests (extended arms of RBI's Issue Department), the primary
responsibility for reaching currency to the banks rests with RBI because of the currency
management structure. Every year, based on the Bank's indent for banknotes and coins, the
Printing Presses and Mints dispatch notes and coins to the RBI offices. From the RBI offices,
the notes and coins are remitted to currency chests operated by commercial banks. The
central bank arranges for transport and police escort for transfer of treasure and bears all the
expenditure related to it unlike other countries where the commercial banks are responsible
for transport of cash. Thus, distribution of cash in India is the primary responsibility of the
central bank. The treasure held in the currency chests is the property of the central bank and
is subject to audit/verification. Any withdrawal or deposit in the currency chest by the bank
holding the chest is reflected as debit/credit in the bank's account held with RBI.
13. To improve last mile connectivity, we have decided to involve private entrepreneurs in the
distribution function. The Cash-in Transit (CIT) companies/Business Correspondents have
been allowed to process coin and banknotes, including packaging, sorting and delivery to
banks' customers and for retrieval. Banks, including urban co-operative banks and regional
rural banks, are also being involved to ensure that last mile delivery of cash related services
penetrates throughout the country. We have also initiated a pilot exercise under the lead
bank scheme for currency management and intend to upscale it going forward, based on the
experience gained.
c) Direct remittance of banknotes
14. At present, remittances of notes from printing presses accompanied by press
representatives and police escort are received at our Issue Offices. After receiving these
boxes, they are subjected to preliminary verification (PV) wherein the contents of the box are
verified by the vault joint custodians in the presence of the press representative. Later, at the
time of sending remittance to banks, packing of the boxes is done in the presence of the
accompanying RBI staff and vault joint custodians. At the bank, the RBI staff remains
stationed till the verification of notes is completed by the bank officials.
15. We have realized that the present process has some inherent inefficiency as the
currency notes have to be transported several times before they reach the public. This not
only reduces productivity but is also cost-inefficient. Accordingly, we have introduced a
scheme for direct remittance of banknotes from Banknote Printing Presses to the commercial
banks instead of routing them through RBI Issue offices to save time, efforts and resources.
The new process is being given greater impetus by the RBI.
d) Pursuit of clean note policy
16. Since the year 1999, the Bank has been pursuing a "Clean Note Policy" to ensure an
uninterrupted supply and circulation of good quality banknotes. As may be seen from the
Table at para 8 above, during the last three years, 13852 million pieces (mpcs), 13771 mpcs
and 14130 mpcs respectively of soiled banknotes were withdrawn and disposed of. While the
objectives of Clean Note Policy have been by and large achieved in respect of higher
denomination notes, the quality of lower denomination notes, especially 10, continues to be
a cause for concern, possibly due to reluctance/constraints on the part of banks to mop up
such notes from circulation.
17. To ensure that genuine banknotes alone are put into circulation, high priority is accorded
to detection of counterfeit notes in the banking system. Towards this end, banks have been
directed to enhance the use of technology to re-align their cash management systems so as
to ensure that cash receipts in the denominations of 100 and above are not put into
recirculation without being machine processed for authenticity. Banks have also been advised
to put in place suitable systems to ensure that counterfeit notes detected are duly impounded
and reported by following the prescribed procedure.
e) Currency processing in India -trends in expenditure
18. The currency production costs in our country have been substantial over the years. We in
RBI have incurred an expenditure of 23.76 billion in 2010-11, 27.36 billion in 2011-12 and
28.72 billion in 2012-13 on this activity. The two note printing presses, BRBNMPL and
SPMCIL, exhibit an increasing trend in their overall expenses viz. 12.22 billion,
13.09 billion and 14.23 billion in the case of the former and 26.17 billion, 27.88 billion
and 32.82 billion in the case of the latter during the last three years respectively, with the
cost of paper and ink contributing significantly in the overall costs. Additionally, RBI has
incurred an expenditure of 5.23 billion for acquisition, upgradation and overhaul of its
59 CVPS machines and 28 SBS (Shredding and Briquetting system) machines employed for
destruction of soiled notes.
The road ahead & key messages
19. Currency management offers significant business opportunities for the players as the
cost of printing of banknotes is increasing every year due to the increasing demand for
banknotes. As I mentioned earlier, this also enjoins certain amount of responsibility on the
part of the vendors. It is expected from them that the products offered are of high quality and
reliability and they strictly adhere to the agreed technical specifications. In this context, I wish
to allude to the failure of the selected bidders in meeting the technical specifications of the
plastic banknotes in 10 denomination that we are proposing to introduce on a trial basis in
India, necessitating undertaking the exercise afresh, thereby delaying the process. The
vendors are also expected to co-operate with the national governments and Central Banks to
avoid production of counterfeits by developing country-specific security features and bringing
about improvisation in raw materials like paper, ink, thread, etc. Any failure of the vendors in
this regard could result in total loss of business with individual countries making efforts to
indigenize.
20. Let me now focus your attention on some expectations that we have from the various
vendors present in the Banknote Conference here. We all agree that the integrity of
banknotes is the most important factor. In this context, it is also actually quite ironical that for
the circulation of forged notes the blame is put on the central bank when, in fact, the blame
should go to the manufacturer of the forged notes as in the case of spurious drugs, where
the manufacturers are prosecuted. However, it is my considered opinion that the integrity of
the banknotes is not a technology issue but more of a law and order issue. When I say this I
feel I would be echoing the sentiments of all consumers of various products that the industry
produces, especially the representatives of the emerging market countries, who rely heavily
on imports for currency production in their respective jurisdictions. I firmly believe that
upgrading the security and design features of the banknotes every few years to outsmart the
counterfeiters is not a long-term solution but only adds to the cost of producing the
banknotes.
21. Let me elaborate what I mean. If the counterfeiters are able to do a good job of producing
duplicate currency, they are obviously having access to good quality currency paper, printing
ink and other components that are necessary for production of banknotes. So, the question
is, what is the source of supply for the fraudsters and what is the role of vendors in
perpetration of these unlawful activities. The commercial banks the world over follow
stringent KYC procedures on their customers. As counterfeiting is a global issue, what I
would like the vendors present here is to similarly do a proper customer identification/due
diligence on all their customers. The vendors must join hands to find out who has supplied
ink, paper, machinery, etc. to the counterfeiters which would enable the regulators to take
appropriate action. In a manner the banks close accounts of customers doing any doubtful
transactions; the suppliers should be able to cut off their links with their doubtful customers.
In fact, the need of the hour is that counterfeiting should be tackled as a criminal activity with
active co-ordination and collective might of all stakeholders-the vendors, Central Banks, law
enforcement agencies, etc. Finding a long-term solution to this menace may also require
close cross-border cooperation between various countries. The global vendors have, in fact,
the maximum stake in ensuring that these problems are countered at the earliest. Over time,
the vendors have made significant investments in building capacities and, in the process,
created economies of scale and scope. They are the least cost producers of the various
ingredients/ components used in production of banknotes and any attempt by individual
countries at creating manufacturing capacities could prove inefficient and in many cases,
wasteful investment. But the bottom line is that any failure to initiate necessary corrective
measures would push more and more countries like India to go for indigenization thereby
resulting in loss of big business for the vendors.
22. The global banknote industry, comprising various manufacturers of machines, paper, ink,
security features, etc is very huge. I understand that the overall market for this industry is
roughly USD 27 to 28 billion. So, while the opportunities for the vendors are immense, I
would also take this opportunity to request all the manufacturers, suppliers, vendors in the
banknote industry to put their minds together and come up with ideas on not only reducing
the cost of paper, ink, machines, etc. but also for enhancing the durability of the banknotes
through technological innovations. The vendors must realize that they also have a
responsibility towards the environment. These innovations are necessary to reflect that the
vendors are conscious about promoting environmental sustainability and "green" practices.
Thus, it is extremely significant that currency production activities are not viewed as mere
business proposition for the vendors but also as something which has serious implications
for the reputation of all stakeholders - the national governments, Central Banks and the
vendors themselves.
23. I once again thank the organizers for the opportunity provided to me and appreciate the
patient hearing given by the participants. I hope that the delegates present at the Conference
would reflect on the messages /concerns that I have tried to convey this morning. I hope the
Conference would deliberate on these issues and come up with practical solutions to the
present/impending challenges. Global co-ordination and intensive efforts to ensure integrity
of banknotes is the need of the hour and I hope that all stakeholders viz., the Central Banks,
state, policy makers and vendors who are involved in the process of production, supply and
distribution of banknotes, would discuss these issues in a more purposeful manner.
Ultimately, this is the prime objective of the Conference. It is our collective responsibility to
bring greater efficiency in the entire currency management function - an essential
commitment that all of us must make to the end users spread across regions and
jurisdictions.
Thank you.