India's Idiotic Currency Management Policies

Today, 3rd January 2016, India read the rather shocking news article that the Government of India issued 160 million currency notes of Re 1 denomination in the last two years (2014 to 2015). The news article also mentioned that the production cost of Re 1 currency notes was Rs. 1.48 per note. This cost obviously does not include the storage and distribution cost, the functions which are performed by Reserve Bank of India at public expense. What was not shocking in the news article was the information that "the process of reissuing new one rupee notes at a high printing cost was a bureaucratic exercise carried out by the Manmohan Singh-led UPA government, and it was done despite stiff resistance from the Reserve Bank of India (RBI)". The RTI activist - Mr. Subhash Chandra Agrawal - who obtained this information claimed to be in possession of the file notings leading to the decision to print Re. 1 currency notes during the years 2014 and 2015. Dr Manmohan Singh led UPA government that was voted out in 2014 has often been described as "the most corrupt government in the history of India" and hence was expected to make corrupt decisions. However, why the subsequent Modi government allowed this atrocity on the Indian economy to continue is very hard to understand. It all sounds very messy but let me tell you, this mess that has come out in the open is just a tip of the iceberg. Reserve Bank of India has been said to have objected to the printing of Re 1 currency notes by the Government of India in 2014 but in fact RBI's own currency mismanagement is nothing short of a never-ending scam in itself. Keep reading...

Indian Currency Notes

(A) Let us start with the CVPS and BSBS

CVPS means 'Currency Verification & Processing System', a mechanised currency sorting system that separates 're-issuable' currency notes from the 'non-issuable' currency notes that need to be destroyed. BSBS means 'Banknote Shredding & Briquetting System' that shreds old currency notes and turns them into little chunks of paper pulp that could potentially be put to some environment-friendly use. Before CVPS & BSBS, old currency notes were subjected to a manual system of verification by RBI's staff. The non-issuable notes later used to be burned. That manual system was highly inefficient and the old currency notes used to get burnt without any meaningful examination. The staff hardly even separated the fake notes from the lot and sometimes the old notes meant to be destroyed were stolen by the RBI staff and put in to circulation again. Burning of old notes was thought to be bad for the environment too. It was a system of all costs and no benefits. To change the things as they stood, a deputy governor of RBI - Mr. Vepa Kamesam - used his might within RBI and brought about a system of mechanised sorting and subsequent destruction of notes. This was around 2003-2004.

CVPS and BSBS changed nothing

CVPS and BSBS machines where not only highly expensive to purchase but also highly expensive to operate and maintain. The spares and consumables for these machines were also purchased from the suppliers of the machines and those foreign companies charged the maximum possible prices. There was another much bigger problem. Dr Vepa Kamesam, DG of RBI, pressurized all the regional offices of RBI spread over the country to "process" as many "old" currency notes in those machines as possible and even forced a two-shift system - day and night - to run the CVPS and BSBS machines. Dr Kamesam was thought of as a terror in RBI and the regional in-charges, called 'Regional Directors' did not want to incur his wrath. They all obliged Dr Kamesam by running the machines day and night without telling the great deputy governor that none of them had adequate number of old currency notes to process and destroy. The old notes were supposed to come from the currency chests managed by commercial banks and they were not sending anything. Apart from a few private sector banks, no bank was doing any sorting of notes into issuable and non-issuable notes. Instead the currency notes received by banks at the cashiers' counters were re-issued to the public as they were. What they had in the currency chests was a mix of both old and new notes and more of those were good quality notes rather than old ones. We all know that bank cashiers would not accept very old notes from the public.

Now in the old manual system of currency management, there was an understanding between the commercial banks' and RBI's staff. Everyone was happy "verifying" and destroying good quality notes because they were easier to handle. But in the new mechanised system. the machines could tell if a note was of good quality and how many pieces of currency notes sent in by a currency chest for destruction were of good, re-issuable quality. This created a sudden problem for the Regional Directors of RBI and led to the beginning of perhaps the most shameful scam in the history of RBI that continues in part even today.

The CVPS scam

In their eagerness to please Dr Vepa Kamesam, the Regional Directors of RBI in consultation with each other and under the informal guidance of the Department of Currency Management at Mumbai, implemented a few 'measures' to ensure continuous supply of 'old' currency notes to feed the CVPS and BSBS machines for both day and night shifts. Some of those measures were as under:

(i) Destroy fresh currency notes

Some of RBI's offices in Northern India, particularly New Delhi and Jaipur offices of RBI, devised this criminal scheme of arranging notes for CVPS machines. These offices of RBI would issue fresh (brand new) currency notes to some of the banks in their jurisdiction. A few days later those banks would deposit the fresh currency notes back with RBI calling it the stock of "old and non-issuable" currency notes. The CVPS staff with the help of the technicians of the suppliers of the machines would switch of the machines' sensors during processing and as a result all the fresh currency notes fed into the machines went in to the destruction pipeline without any verification or sorting. That would run the machines continuously and the regional offices of RBI were able to send productivity reports to Dr Vepa Kamesam.
(ii) Switch off the sensors of CVPS machines for a few hours on each day

The re-issuable notes sorted by the CVPS machines required further processing. After the each processing shift, the re-issuable notes were required to be counted, verified, & bundled to be sent to RBI's vaults before the vaults were closed for the day. More re-issuable notes on a day could delay closure of the vaults. Therefore, after the lunch session everyday, the sensors of the CVPS machines were switched off so that no re-issubale notes would be generated by the processing in the afternoon session. Switching off the sensors meant that even the fake currency notes or even pieces of plain paper would get counted as currency notes but nobody cared. They did not want any re-issuable notes after lunch time. This part of the scam was implemented at all the regional offices of RBI and continues to this day with no chance of stopping.

Useless software

The CVPS machines run a software that does not generate any meaningful audit trail. The only thing that matters is how many pieces were processed. The software cannot tell for how many hours of the processing the sensors were switched off.

Fundamental flaw in CVPS

Even if the sensors of the CVPS machines are not switched off by someone, there is a fundamental flaw in the working of these machines. The standard by which to judge the quality of a note by the machine is not set permanently. The CVPS staff take out a few 'good quality' sample pieces of notes from a batch of notes received from a currency chest. These sample pieces are then run through the machine to calibrate the machine as to what is the accepted quality of re-issuable. If a few totally fresh notes were used for this calibration, then during the actual processing of the batch the machine would put everything that was not fresh in the destruction pipeline. Hence the CVPS staff are easily able to control and manipulate the percentage of re-issuable notes that a batch of processing would generate.

Phone calls from "top"

The Regional Directors of RBI receive phone calls from Mumbai - usually in the name of some deputy governor - to increase or decrease the percentage of re-issuable notes generated by CVPS machines. These percentages are then used in Mumbai to take "informed' decisions regarding CVPS operations in RBI. You want proof of all these things I wrote above, just look inside your wallet or at the vegetable shop the next time you go there. What is the quality of notes in circulation in India? It is so because all the good quality notes get destroyed in the CVPS machines and the bad quality notes remain with you and me.

Too many CVPS machines were purchased

CVPS machines were expensive and imported too. There was pressure from many interested parties to force purchasing of more machines. I will give a stunning example here. In the year 2010, I was present at a meeting of RBI's Local Board in RBI New Delhi. One of the members of the Local Board brought up this subject. He said that instead of forcing the commercial banks to ensure sorting of currency notes, RBI was just telling them to send more and more currency notes for processing in the CVPS. If commercial banks did the sorting, then the quality of notes in circulation would improve and old notes would get destroyed. If commercial banks did not do any sorting then good quality notes would get destroyed in the CVPS machines and poor quality notes would remain with the public. That was a very valid point and all the members of the Local Board and the Regional Director of RBI New Delhi agreed with the observation. There was an urgent need to put pressure on commercial banks to ensure sorting of currency notes. Now after this very nice discussion, do you know the resolution that was passed by the Local Board in that meeting? The Regional Director of RBI New Delhi proposed and the Local Board unanimously agreed that in order to improve the quality of currency notes in circulation, a proposal would be sent by the Local Board to the Central Office of RBI to double the number of CVPS machines in all regional offices of RBI.

The BSBS scam

The whole idea of BSBS was to shred the notes and turn them into briquettes and then to put those briquettes to some good use. After all, burning of old currency note was bad for the environment. In reality, after spending crores in purchasing and running of those monster machines, the briquettes are eventually sold to scrap dealers who in turn sell them to industrial units for burning in their boilers. The scrap dealers are chosen after a due process of tendering but the intended final use of the briquettes is never one of the conditions in the tender issued by RBI. No one in RBI cared, even in the initial few months, as to how the briquettes were being disposed of. Probably Dr Vepa Kamesam was not asking that question.

More scams to cover old scams

Later when regularly feeding fresh notes into CVPS machines became impractical, many of the CVPS machines purchased by RBI in those "golden" years were "retired". Many offices of RBI are now stuck with these retired CVPS machines and RBI sometimes even pays maintenance charges on the idle machines. Some so-called "dynamic" measures have been implemented too. The dynamism works like this: A low-ranking officer of RBI takes a cursory look at the currency notes sent in by a currency chest. A couple of 100-piece packets are manually verified by the officer to see if the packets contain too many re-issuable notes. Then he pronounces that only 1 or 2 re-issuable pieces were found in the packets verified by him and the entire lot can be destroyed directly in the BSBS system without being subjected to a CVPS examination. Needless to say that even the fake currency notes printed in Pakistan will get counted as genuine and eventually get turned into briquettes for boiler fuel. Sometimes an odd low-ranking officer chosen for the cursory dynamic examination of notes ends up giving what is called an "adverse" report saying that the lot contains too many re-issuable notes and apparently the commercial bank has sent unsorted notes. Such an officer instantly enters the bad books of his superiors and risks hurting his carrier prospects in the near term. Usually, however, the verification officer is coached in advance and almost all of them give clean reports. Banks know this dynamic system in RBI well and thus take advantage of it to the hilt.

No CAG or other audit

Reserve Bank of India is exempted from CAG audit and its annual statutory audit only covers compliance or otherwise with accounting principles. There is no audit mechanism to check the wastage of public money in RBI. I guess the scams in RBI will continue.

Currency notes printed before 2005

Recently RBI decided that the currency notes printed before 2005 will not be valid and the responsibility was put on the public to deposit such currency with the banks. RBI did not care about the banks taking these currency notes from the public and then issuing them back to other customers across the counter. What an idiotic decision. RBI simply does not have the competence to force the banks to sort old currency notes out of circulation.  

(B) Where are the polymer notes?

Every now and then RBI issues some statement regarding the issuance of polymer currency notes. These statements have been coming for the last few years but the country is yet to see any polymer money. Even if we ignore the polymer notes issue, is India's currency management logically or even morally right? Let us compare India with Thailand. I have visited Thailand over a dozen times and have never seen a poor quality currency note there. In India we see more bad quality notes than good ones. Thailand does not have any 10 THB notes. There are only coins up to 10 THB and the currency notes start from 20 THB. 10 THB is roughly equal in value to Rs. 20. Going by the Thai standard, in India we do not need any currency notes up to Rs. 20. The least we can do is to have only coins up to Rs. 10 and discontinue Rs. 10 currency notes immediately. For Rs. 20 and 50 we can have polymer notes and then paper currency from Rs. 100 upwards. Instead of doing this, we are printing Rs. 5 and Re 1 currency notes. I have not even seen any Re 1 currency note in circulation since 2014. God knows where those 160 million pieces went. The UPA (Congress) government ordered printing of Rs. 5 notes before the 2009 general election and Re 1 notes at the time of 2014 general election. The Congress Party perhaps needed the bribes and commissions from this currency printing to fund their election campaigns. But now we see the BJP government also turning a blind eye to the wastage of public money on the printing of Re 1 currency notes whose printing costs more than the value of the currency. The situation is very depressing. With its corrupt politicians and incompetent institutions, India's currency management system has little chance of improving.