Banking Central | Black money menace, rampant fake currency behind Rs 2,000 note recall

Rs2000

The biggest headline in the news space towards the end of last week was that the Reserve Bank of India would start withdrawing Rs 2,000 currency notes from May 23. People will have time till September 30 either to exchange or deposit these bills at bank branches or select RBI offices, though they will continue to be a legal tender.

The Rs 2,000-denomination notes were introduced to remonetise the system after the government banned the Rs 500 and Rs 1,000 notes in November 2016 to check a surge in fake currencies.

But, why did the RBI choose to withdraw these bills? There could be a few possible reasons. First, it makes sense to terminate the denomination that isn't in use much compared to other denominations. The total value of these banknotes has declined from Rs 6.73 lakh crore at its peak on March 31, 2018, with 37.3 percent of notes in circulation, to Rs 3.62 lakh crore, constituting only 10.8 percent of notes in circulation on March 31, 2023, shows RBI data. As a percentage of total currency in circulation, these notes have bene declining over the years. Hence, it was only logical to withdraw these notes sooner than later.

Second, the Rs 2,000 notes created a headache for the government and tax authorities as illegal elements used these bills widely. Going by the data from the income tax department, these notes have constituted a major chunk of the black money seized in recent years.

In November 2019, Finance Minister Nirmala Sitharaman told  Parliament that 43.22 percent of unaccounted cash seized in the financial year 2020 was in the form of Rs 2,000 notes. In the financial year 2018, the Rs 2,000 note made up 67.91 percent of unaccounted cash, while the figure was 65.93 percent for FY19. Consolidated data is not available for 2020-2022 but the trend is likely to be largely in line with the previous years.

Third, Fake currency rackets loved the Rs 2000 bills. The Rs 2,000 notes were  used rampantly by the fake currency mafia ever since they were introduced. According to this Business Standard report, a major chunk of the fake currencies seized in the last three years was in Rs 2,000 denominations. The report says that in 2021, the face value of seized fake notes of the Rs 2,000 denomination stood at Rs 4,84,78,000 crore. Also, as many as 2,44,834 lakh fake notes of Rs 2,000 in 2020 and 90,566,000 notes were seized in 2019. This probably convinced the government that there is a looming risk with continuing these high-value bills.

The Rs 2,000 notes were stopped from printing way back in 2019, which would mean that these currency notes would have gone out of circulation in the next few years anyway. But, possibly, the government and the RBI wanted to give the black money holders a jolt by making the sudden announcement.

Read: With his Rs 2,000 knock, Shaktikanta Das deals a body blow to black-money hoarders

Black money holders with countless unaccounted Rs 2,000 currency notes will get exposed if they choose to deposit the money in bank branches in one go. But certainly this category will find a work around creating challenges for the tax department. There is a possibility that the black money hoarders will try to split the stock into smaller quantities and deposit in multiple accounts to escape the taxman's lens.

However, in the near term, the withdrawal of Rs 2,000 notes will help to curb the black money menace and, at least temporarily, will weaken the fake currency lobby.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.