Explained | Why Rs 2,000 notes are being withdrawn

The Reserve Bank of India has decided to withdraw Rs 2,000 denomination currency notes from circulation. Naturally, the public is curious about how similar the move is to the demonetisation of Rs 500 and Rs 1,000 notes in 2016.

The decision to withdraw Rs 2,000 notes is different from demonetisation which involves eliminating the lawful acceptance status of a monetary unit in an economy. As opposed to Rs 500 and Rs 1,000 notes Rs 2,000 notes will continue to serve as a legal tender.

Onmanorama spoke to finance and banking expert S Adikesavan on the issue.

What is the reason for the withdrawal of Rs 2,000 notes?

According to the RBI, the note is being withdrawn as it has already served its intended purpose. It was introduced in November 2016 to meet the immediate currency requirement of the economy after withdrawal of the legal tender status of all Rs 500 and Rs 1,000 banknotes in circulation. Incidentally, the printing of Rs 2,000 denomination banknote was stopped in 2018-19. The latest RBI move is merely an attempt to withdraw the remaining notes from circulation.

What is the Clean Note Policy?

The withdrawal of notes is also part of the Clean Note Policy followed by the RBI for the past 18 years. The policy seeks to give good-quality currency notes and coins with better security features to the public and withdraw soiled notes from circulation. Since the current notes have already crossed the estimated lifespan, which is 4-5 years, the decision is not altogether surprising.

“Most of the general public have not come across a Rs 2,000 note in the past two years. Only limited notes remain in circulation. The RBI's withdrawal is just a part of the regular Clean Note policy,” says S Adikesavan, an expert commentator on banking and finance.

Will it continue to be legal tender?

Though the RBI has instructed the public to return Rs 2,000 notes by the end of September, the notes will continue to serve as legal tender.

The RBI had earlier decided to withdraw from circulation all banknotes issued prior to 2005 as they have fewer security features as compared to banknotes printed after 2005. However, the notes issued before 2005 continue to be legal tender.

How many Rs 2,000 notes are in circulation?

The stock of money in circulation is 10% of the total stock. According to the RBI, out of the Rs 33 lakh crore of total currency in circulation in India, 10% are Rs 2,000 notes. This amounts to Rs 3.3 lakh crore. A majority of Rs 2,000 denomination notes issued prior to March 2017 have completed their estimated lifespan and are not observed to be commonly used for transactions any more.

Is the Rs 2,000 note withdrawal different from withdrawals of other denominations?

According to Adikesavan, the present move is no different from the withdrawal of regular notes from circulation. “In 2014, the RBI had withdrawn a few notes from circulation. The current discussions are a natural repercussion of the 2016 demonetisation. The Rs 2,000 withdrawal is an outlier only because it is one of the largest denominations ever printed ,” he said.

What should banks do?

On May 19, the RBI asked all banks to discontinue issue of Rs 2,000 denomination banknotes with immediate effect. ATMs/Cash Recyclers may also be reconfigured accordingly. Banks holding currency chests shall ensure that no withdrawal of Rs 2,000 denomination is allowed from them. All balances held in the currency chests shall be classified as unfit and kept ready for dispatch to respective RBI offices. The currency chest of the RBI consists of the cash meant for the banks and ATMs.

Branches have also been asked to estimate their cash requirement and obtain banknotes of other denominations from the RBI well in time.

What should the public do?

The facility for deposit and exchange of Rs 2,000 banknotes shall be available for members of the public up to September 30, 2023.

1. How to deposit

The RBI has clarified that Rs 2,000 notes can be deposited into bank accounts in the usual manner subject to compliance of the Know Your Customer (KYC) norms and other regular requirements.

The facility for exchange of Rs 2,000 banknotes shall be provided to all members of the public by all banks through their branches.

2. How to exchange

The facility for exchange of Rs 2,000 banknotes shall be provided to all members of the public by all banks through their branches from May 23, 2023. All banks may exchange Rs 2,000 banknotes up to a limit of Rs 20,000 at a time. Business Correspondents (BCs) may also be allowed to exchange Rs 2,000 banknotes up to a limit of Rs 4,000 per day for an account holder. For providing deposit/exchange facility to people residing in remote/unbanked areas, banks may consider using mobile vans, if necessary.

What happens if a large amount of Rs 2,000 notes are exchanged?

If there is any transaction which is out of alignment with a regular transaction, banks have a policy of identifying them as suspicious transactions. They have to report these transactions to the government as suspicious transaction report (STR) for security purposes. These norms might apply to the Rs 2,000 note withdrawal.

“It does not imply that these transactions are illegal. It means the banks need to ensure transactions are normal,” Adikesavan said.

“Cash transactions above Rs 10 lakh are usually reported as STR. There are over 60 parameters outlined by the government for banks to identify suspicious transactions. In addition, banks have other parameters to flag such transactions. In large banks, over 100 employees are monitoring transactions on a real time basis.”

“The common man need not be concerned about this. Even if a transaction is reported, it can be cleared with proper documents,” he said.