Though the central bank has said it regularly withdraws soiled and old notes from circulation and this is a routine exercise, the move is significant because of its timing - ahead of the Lok Sabha elections, likely in the middle of April. Also, the conditions set this time have led many to believe it might be an effort to unearth black money.
If non-customers want to exchange more than 10 pieces of Rs 500 or Rs 1,000 notes at a bank after June 30, they have to furnish their proof of identity and residence. This means the bank can ask them for copies of their PAN or Aadhaar or driving licence.
Apart from the black-money angle, according to bankers, there also are cases where people have made exchanging soiled and old notes at a discount their business and are making profits. RBI's insistence on producing proof of identity could also be aimed at discouraging such practices.
"Old notes do not have as many security features as the newer ones. Identifying fake currency is easier in the newer ones. This is why RBI wants old notes withdrawn," a banker said.
Government officials, however, said the finance ministry had never suggested RBI any such move for tackling black money, as demonitisation of currency could have repercussions for the economy, particularly in the case of the commonly-used Rs 500 notes. They said RBI might have decided to withdraw old notes from circulation because a lot of counterfeit currency had entered the market.
"It is not demonitisation. If that happens, gold prices will go up, with people beginning to put their money in non-productive assets. I don't think it can check black money... Since the old notes don't have adequate safeguards, these can be replicated easily. There won't be too many genuine notes of Rs 500 and Rs 1,000 issued before 2005. So, by this move, counterfeit currency will get eliminated," said a former CBDT chairman closely involved in drafting of a report on black money.
| Some answered and unanswered questions |
WHICH NOTES TO EXCHANGE?
Those from before 2005
HOW TO IDENTIFY?
The notes printed before 2005 do not have years written on them
WHAT'S THE PROCESS?
Apr 1 to Jun 30, 2014: Approach a bank branch (banks are required to exchange those for both customers and non-customers)
Jul 1 onwards: To exchange more than 10 pieces of Rs 500 or Rs 1,000 notes, non-customers have to give proof of identity & residence
THE QUESTIONS THAT REMAIN
Pieces of soiled currency notes processed and removed from circulation in 2012-13 (358 mn more than the previous year)
Pieces of soiled and old notes processed through RBI's 59 CVPS in 2012-13
A tax partner with a leading consultancy, on the other hand, said the move could partly address the issue of black money. But he added it might not be very effective because people would immediately convert into gold or other assets.
It is not difficult to identify notes issued before 2005, as these do not have year of printing written. These notes are not lose their legality even if these are not exchanged. RBI clarified the notes issued before 2005 would continue to be legal tender. This means, banks are required to exchange the notes for their customers, as well as non-customers.
Like customers exchange their soiled and old notes with banks, lenders exchange theirs with RBI through the several currency chests across the country. In the course of this, RBI had already withdrawn several notes issued before 2005. So, the outstanding stock of such notes might not be very big, said a senior official from a leading public-sector bank. Therefore, he added, banks might not be required to make special arrangements to facilitate the withdrawal.
According to RBI's annual report, around 14.1 billion pieces of soiled currency notes were processed and removed from circulation in 2012-13. The number of notes withdrawn from circulation and eventually disposed of at RBI offices during the year was 358 million pieces higher than the previous year. In 2012-13, around 8.97 billion pieces were processed through RBI's 59 currency verification and processing systems and the rest were disposed of under other modes.