Tuesday marks the end of an era. From January 1, no bank will be allowed to staple soiled notes while sending them to the Reserve Bank of India.
This is only the first phase. In the second, which is a few months away, banks will not be allowed to offer stapled notes to customers.
The RBI has already started work on easing the transition. One alternative to stapling it is exploring is giving notes in plastic pouches.
"When one takes a bundle of Rs 10,000 (100 currency notes of Rs 100 denomination) from a bank teller, one must be convinced that the bundle contains the required number of notes. Stapling is reassuring, but it reduces the life of currency notes. We will have to ensure that this is done in a systematic manner," said an RBI official.
The RBI's presses have also started bunching notes in non-tearable bands.
RBI Deputy Governor Vepa Kamesam said the deadline for retrieving all soiled notes from the currency chests expired on December 31 and would not be extended. "Hundreds of chests have come from various banks. We gave them a three-month extension till December-end," he said.
The pressure on banks to dispose soiled notes by Tuesday is part of the RBI's clean note policy.
The central bank had introduced a scheme of financial compensation to encourage banks to speed up the disposal of soiled notes in circulation.
The scheme ended in September, and was renewed for three months.
Once the soiled notes come to the RBI, they are put through the currency verification processing system. The central bank sets a 'tolerance level' in the machine to decide on notes to be re-issued.
The ones failing the test are sent to the shredding and briquetting machine to produce currency bricks.
In 2002, 41 billion pieces of currency were distributed, with the majority accounted for by notes of lower denomination.
Since the RBI offices are located only in 18 places in the country, the distribution of notes and coins is done through designated branches of commercial banks, which store notes and coins in chests on behalf of the RBI.
Net deposits and withdrawals of notes and coins are reported on a daily basis to the RBI.
A net withdrawal from the chests means an expansion in currency, while deposits result in a contraction.
Notes in circulation being the liability of the RBI, it adjusts its asset-liability position centrally for such expansions or contractions.
The movement of currency takes place in specially built trucks when the journey can be completed during the day and by train for longer distances. The chests are guarded by the police.
The annual capacity of RBI's presses is 18 billion notes. They can print up to 28 billion pieces if they work in two shifts.
The minting capacity is 4,700 million coins. The central bank needs about 12,000 million pieces of notes and about 5,000 million coins annually.
The pace of replacement of old currency has been slow, leading to the deteriorating quality of notes.
The capacity to print notes increased after 1999, but the capacity to process and destroy notes in the RBI needs to increase so that the central bank's stock of soiled notes can be destroyed to accommodate new notes.
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