The Reserve Bank of India (RBI) on May 19 as a part of its ‘Clean Note Policy’ ordered the withdrawal of notes of Rs 2,000 denomination from circulation but kept its legal tender status.
The central bank also asked banks to stop issuing Rs 2,000 banknotes with immediate effect.
As a part of the Clean Note Policy, the central bank usually weeds out soiled currency notes and replaces them with fresh ones. The Clean Note Policy was announced by the then RBI Governor Bimal Jalan in January 1999.
To complete the exercise in a time-bound manner and to provide adequate time to members of the public, all banks have been instructed to provide deposit and/or exchange facility for Rs 2,000 banknotes until September 30, 2023, the RBI said.
Earlier this week, RBI Governor Shaktikanta Das said they expect most of the Rs 2,000 notes to return to the banking system by September 30.
But have you ever thought about what banks or the central bank do with these soiled or not-in-use notes ? Here is an explainer.
How does the RBI collect soiled or not-in-use notes?
The central bank in its release earlier said that it arranges to collect soiled and mutilated notes from the public by going to marketplaces.
But in the case of Rs 2,000 banknote, it has asked people to deposit or exchange it to the nearest branch of their bank or select branches of the RBI.
Also read: Scarce use, risk of collateral issues behind withdrawal of Rs 2,000 notes: Das
What happens after this?
After this, these notes are sent to the currency verification and processing system (CPSV) installed in RBI for faster and secured processing of soiled currency notes. According to the RBI, each CVPS is capable of processing 50,000-60,000 notes per hour.
What is CVPS?
CVPS was put in place in February 2003 by the then RBI governor Bimal Jalan for faster and secured processing of soiled currency notes.
CVPS counts the notes and examines their genuineness. Thereafter, it separates them into fit and unfit categories and destroys the unfit ones by shredding them. The fit notes would be cut in a way so that they could be recycled into the new currency notes.
What does the RBI do with unfit notes?
After shredding the notes deemed unfit, they are transported securely to a separate briquetting system where they are compacted. The system is also environmentally friendly, as it does not create pollution as was the case when they were burned in the past.
The briquettes can be used as residual fuel in industrial furnaces. They can even be used for filling up land or for making items such as paperboard.
Disposal of soiled banknotes
According to the 2021-22 RBI annual report, the disposal of soiled banknotes rose by 88.4 percent to 1,878.01 crore pieces from 997.02 crore pieces in the previous year.
Also read: Rs 2,000 note withdrawal: Banks see no rush for exchange, deposit
Are these briquettes sold?
Usually, the central bank invites tenders to sell the briquettes for industrial use. In 2016, when Prime Minister Narendra Modi announced the demonetisation of the old Rs 500 and Rs 1,000 banknotes, the shredded remains of these notes were sold to Western India Plywoods Limited.
Will the RBI follow the same process this time?
A senior banker on condition of anonymity said that will most likely be the case. “They may follow the same process this time too and that shredded papers can be later used for new currency,” he added.
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