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RBI plans plastic currency. Why does it makes sense?

News reports quoted a parliamentary proceeding in India today which seems to indicate that RBI has already ordered polymer printing materials to initiate printing & circulation of plastic currency in India in very near future.

First question is why? There are a few clear reasons:

  1. Currency Durability:
    1. Polymer material is much more durable than the paper currency and hence it is expected to survive 2.5 times the normal survival time period of a paper currency (generally 2-5 years depending on the value of the currency, higher value are transacted lesser and kept better by persons and hence survives better). Actually as per New Zealand Central Bank (they have polymer currency running from 1999), polymer notes lasts 4 times longer than paper notes
    2. The survival is very important as one of the major challenges for central banks is to replace soiled notes every year. For e.g. Bank of England replaces 22,000 notes every year
    3. The above only adds to the overall cost of cash. As per latest RBI FY16 annual report, during FY1516, 16.4 billion pieces of soiled notes were disposed (18.2% of total notes in circulation-90.23 Bn) with INR 10 notes  at 5.4 billion followed by 5.17 Bn of INR 100 and 2.8 Bn of INR 500 notes and only 0.625 Bn of INR 1000 notes
  2. Counterfeit Resilience:
    1. A Bank of England research study concluded that polymer currency provides greater counterfeit measures corresponding to paper currency
    2. Polymer can allow incorporation of higher & sophisticated security features compared to paper
    3. E.g. as per the research report ‘polymer notes allow for the inclusion of intricate and complex windows, which can be a security feature on its own right’
    4. Canada claims to have a $100 plastic note with most advanced security feature which includes hologram within the transparent window
    5. Considering that polymer can not be printed in normal printers compared to paper currency and that it has more sophisticated security features, means lower chances of counterfeiting. NZ central bank research & publication (Countering Counterfeits, May 2010) shows that counterfeit notes detected in circulation drastically dropped from ‘8.8 per million notes in circulation’ in 1999 (start year of polymer) to <1 (0.9) by 2009
    6. Consider this: As per RBI 201516 data, nearly 6.33 lakh FICN (Fake Indian currency notes) were detected only in banking system. Obviously, the actual number of FICN in circulation will be several multiples. As per Indian Statistical Institute estimates, 250 out of every 10 lakh notes are fake and every year FICN worth 70 crore is infused into the country every year
  3. Environmental Friendly:
    1. This sounds counter intuitive as paper is bio degradable etc. But as per RBA (Reserve Bank of Australia), worn out paper bank notes are difficult to recycle, but polymer notes post lifespan, are shredded and converted into pellets and recycled and used as a raw material for other recycled products
    2. Paper currency are primarily made of Cotton which consumers lot of pesticides & water

Hindrance to introduction of polymer currency can come from primarily:

  1. Initial cost of production is higher. For example a news report quoted that BOE (Bank of England) expects new polymer notes to cost 50% more to make. But the equation changes when the total cost over 5/10 years is considered as there will be lesser notes to print every year later on due to higher durability of polymer notes
  2. Paper currency security features are also being enhanced substantially. For e.g. USA has 3D blue security ribbon feature for it’s $100 note introduced in 2013
  3. Usage challenges: Tends to be more slipper, difficult to fold
  4. Recycling challenges: For countries with infrastructure challenges, recycling can become a challenge and can lead to actually burning or otherwise inefficient ways of destroying expired notes. That can have environmental impact.

How many countries have been using paper currency & to what extent? There are quite a few countries e.g. USA, Australia, New Zealand, Maldives (some estimates puts it at around 14 countries) which are using polymer currency. Australia has long converted to polymer while USA has no immediate plans of moving to ‘only polymer’.

So it seems more sensible for RBI to introduce plastic currency. It makes sense to start with a smaller denomination as any adverse impact can be controlled very easily with minimum inconvenience. RBI has been toying with the idea for long and a 2002 news report suggests that an initial experiment failed as the polymer notes were not conducive to hot & humid climate of India. While climate has not changed but what has changed is technology and that perhaps now creates an opportunity to make this a success.

One last question, does it make sense to introduce a different currency when the country is supposed to move towards cashless? The answer is resounding ‘Yes!‘. The journey to cashless is going to be a very long one (we are supposedly at 5% non cash economy, likes of Belgium, Australia, Sweden etc. are in the range of 35-45% cash economy). As per latest stats of RBI, ‘at end-March 2016, the value of banknotes in circulation was ₹16,415 billion showing an increase of 14.9 per cent as against 11.4 per cent in 2014-15’, while actual currency in circulation is 83,579,000,000

As to the latest official status on plastic currency, the RBI annual report makes it quite clear in it’s annual report. As per the same:

A billion pieces of banknotes in denomination of  INR 10 were to be printed on all available plastic substrates and issued to the public in five cities having different climatic zones, viz., Kochi, Mysuru, Shimla, Jaipur and Bhubaneswar, on a field trial basis.

Sources:

http://www.bankofengland.co.uk/banknotes/polymer/Documents/counterfeitresilience.pdf 

https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/0RBIAR2016CD93589EC2C4467793892C79FD05555D.PDF

http://banknotes.rba.gov.au/production-and-distribution/recycling/

http://www.thehindubusinessline.com/2002/10/09/stories/2002100902101000.htm

http://www.bbc.com/news/magazine-15782723

http://www.Chemistryworld.com

Britain’s new plastic banknotes will cost 50% more to make—but at least they’ll fit in your wallet

http://www.rbnz.govt.nz/news/2010/05/countering-counterfeits

https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?Id=1181

http://indianexpress.com/article/explained/on-paper-1-in-4000-are-fake-notes-on-indias-huge-currency-problem-2840193/

https://data.gov.in/catalog/statistics-notes-circulation

 

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