Showing posts with label RBI. Show all posts
Showing posts with label RBI. Show all posts

Legal Tender | Banknotes | Coins | Currency of India



What is meant by Legal tender? (tender=offer): Any official medium of payment recognized by law. A creditor (~predator) is obligated to accept legal tender toward repayment of a debt.

The Indian rupee (INR) is legal tender in Nepal, Bhutan & Zimbabwe, but the Nepalese rupee and Bhutanese ngultrum are not legal tenders in India (Zimbabwean $ has been suspended by Govt due to hyperinflation).

Nepalese rupee's value was pegged to the INR in 1993 at a rate of 1.6 Nepalese Rs = 1 INR. Bhutanese ngultrum is pegged at par with Indian rupee.


What would you prefer as payment - legal tender or not-a-legal-tender?
Bitcoin is a virtual online currency that can be used for a growing number of transactions but its not considered legal tender anywhere. As INR is guaranteed by Indian Central Govt (s/26 RBI Act) it is more stable & accepted by all. (Do you've a right to recover from GOI/RBI value of a lost, stolen, imperfect note?)


Can you guess how much stamp duty does RBI pay to Govt on banknotes?
Well each note is a 'legal-note' & have a value attached to it but RBI pay nothing to govt for it to make legally binding on itself or Govt, as its exempted from paying stamp duty under s/29 RBI Act (Not under Indian Stamp Act).


Do shops or individuals have the right to refuse payment in coins or notes, even legal tender ones?

Contrary to popular belief, shops or individuals do have the right to refuse payment in coins or notes, even legal tender ones, before a transaction has taken place, and to demand payment in whatever form they choose.

However, when the debt has already been incurred (which, under the legal concept of 'invitation to treat' the vendor has already supplied a good or service prior to payment), then they are obliged to accept settlement of that debt in currency up to the amount authorized in law.

1 Rupee coin & notes are legal tender for unlimited amounts. 50 Paisa are legal tender for any sum not above Rs 10. Coins of smaller than 50 paisa value are legal tenders of a sum below Rs 1. (under Indian Coinage Act 1906).

So if you want to purchase 1 toffee of Rupee one with One Thousand rupee note, then shopkeeper can refuse accepting the 'legal tender'. Same way if you've had good meal at a restaurant & now want to pay them in 1 rupee coins then they can't refuse it - as you've already accepted their service - and 1 rupee coins are legal tender for unlimited amounts.


Legal Tender of India
The Indian rupee i.e INR is the only legal tender in India,

Its symbol was officially adopted in 2010. The first series of notes/coins with the rupee symbol was launched on 2011. Historically, the rupee (derived from the Sanskrit word raupya which means "wrought silver, a coin of silver"), was a silver coin.

RBI introduced "Mahatma Gandhi Series" banknotes on 1996 - it's called so because on the obverse there is a pic of Mahatma Gandhi (along with other features).
 A Mahatma Gandhi Series Note

A Pre Mahatma Gandhi series note - Ashoka emblem


Currency Management in India
Under s/22 of RBI Act; RBI has the sole right for issue of notes in India. Denomination of notes that are issued: 5,10,20,50, 100, 500, 1000. The design, form and material of the bank notes are recommended by Central Board of Directors of RBI and approved by GOI.

Like every country India's central bank - RBI looks after currency management. Interestingly Hong Kong, Scotland & Northern Ireland are exceptions where a commercial bank is the note issuing authority.

Can banknotes be issued only in some specific denominations?
Not necessarily. RBI can issue notes of 5000, 10000 or any other denomination that the Central Government may specify, but not greater than 10000.


COINS
Indian coins have a different story. GoI has the sole right to mint coins  (NOT RBI), [not higher than Rs 100/-]. The dimensions, designs, composition, weights of coins are also responsibility of GoI (Indian Coinage Act).

One Rupee note is issued by Min. of Finance & bears sign of Finance Secretary.

The coins are issued for circulation only through RBI in terms of the RBI Act. The RBI places an annual indent for this purpose and GoI draws up the production programme for the 'India Government Mints' on the basis of the indent. The 'India-Govt-Mints' are at Mumbai, Alipore(Kolkata), saifabad(Hyderabad), Cherlapally (Hyderabad) and NOIDA (UP).


How does the currency reach to the people?
Notes are printed at 4 presses: Dewas(MP), Nasik (Maharashtra), Mysore (AP) & Salboni (WB) & coins at above centers. All the notes/coins travel by way of Rail/ Spl trucks accompanied by heavy Police force to RBI Offices & then to Currency chest branches (of your banks). Journey from these chest branches to individual non-chest neighborhood branch is carried out by the bank concerned.

Network of Notes Presses & Mints

Flow of new printed currency

All this involves heavy use of security, logistics, coordination & the cost of transferring to banks is borne by RBI.

What happened to torn, defaced, dirty currency?
Soiled notes (dirty, limp due to excessive use) & Mutilated notes (torn, disfigured, burnt, eaten by white ants, washed etc) are taken out of circulation. If you deposit such notes across counters in banks then they are kept separately from good notes & sent to RBI. RBI has statutory obligation to not to re-issue such torn, deface notes to public (s/27 of RBI Act).

Where do banks hoard currency?

Currency chests are stores where stocks of banknotes & coins are kept by banks on behalf of RBI. Its an extended arm of Issue Department. All PSU banks, 1 foreign bank (Stan Chart), 1 State Co-op bank (Rajasthan State Coop bank), 1 Regional Rural bank (Prathama Bank, Moradabad) have these chest branches. RBI has 1 Currency chest in Kochi.


How RBI oversees currency management function?
Issue Department
RBI has 2 major symbolic Depts a) Issue Dept & b) Banking dept.  Issue dept as name suggests oversees only currency issuance business of RBI and Banking dept deals with the banking system. The difference is just symbolic anyways as there are large linkages between the two.

This dept is given statutory role by RBI Act to manage currency.

"Department of Currency Management" in RBI attends to the core statutory function of note and coin issue and currency management. This dept do the forecasting the demand for fresh banknotes & coins, placing indent, receiving supplies & distributing them through network of currency chests.




Preamble and Management of RBI


RBI: established on 1 April 1935 under RBI act 1934 (on recommendations of John Hilton Young Commission 1926 - called Royal commission on Indian Currency & Finance). RBI used to be shareholder's bank, then nationalized w.e.f 1st Jan 1949.

Earlier SBI (Imperial bank of India) was conducting Central bank's functions.


Central office in Mumbai since 1937 (initially in Calcutta) formulates policies.


Preamble of RBI: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."


Paid-up Capital of RBI: Rs. 5 crores



Management: RBI affairs are governed by Central Board of Directors, which is appointed by GOI under RBI act. It consists of:

1) Official Directors: 1 Governor (Dr. Raghuram Rajan), not more than 4 Dy. Governor appointed by GOI.

By convention out of 4 DGs 2 are promoted from within RBI ranks, 1 is economist & 1 is commercial banker. Right now the DGs are:

Sh. H.R. Khan, Dr. Urjit Patel, Sh. R. Gandhi.


2) Non-official Directors: 10 nominated by GOI from various fields & 2 Govt officials.


3) 4 Directors 1 each from Local boards.


Local Boards are situated at 4 metros their basic function is : "To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks..."

For present list of Governor, Dy. Governors, Directors click here.

RBI as Banker to Government



One of the important role of RBI is being Banker to Governments - GOI & State Govts. It doesn't get much public attention because it does not directly impact prices/ policy rates/ GDP figures of the country. However it's an important role of RBI. RBI also gives financial advice to govt, whenever called to do so.

RBI - banker to Government.

Legal Framework:


RBI Act 1934:

RBI has the 'obligation' to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Union.


RBI has the 'right' to transact Government business of the Union in India.

Accordingly RBI is also banker to all State Govts, as per the agreements they enter into, except J&K and Sikkim.

RBI does NOT get any remuneration for the conduct of ordinary banking business other than the advantages which may accrue to it from the holding of their cash balances free of obligation to pay interest thereon.


Banker to Central Govt:

Work relating to Govt. business is handled by Public Accounts Dept of RBI. Govt's Principal accounts are maintained at Central Accounts Section in Nagpur. Duties involve receipt & payment of moneys on behalf of various govt dept.


Each ministry/Dept has been allotted a Public Sector Bank for handling it's transactions based on principle of 'One Bank - One Ministry/Dept'. The responsibility of maintenance of accounts lies with individual Ministry/Department only. This includes arranging payments, accounting receipt, disbursal, auditing of transaction. RBI does NOT handle day-to-day transactions as before, except where nominated.


Banker to State Govts:


The financial transactions of State Govts are done at various agency bank branches in respective states. All the transaction are consolidated at 'Link cell' in State Capital & settled with RBI office in the state. All consolidated position are then ultimately booked in Principal Accounts of the resp. State maintained @ CAS (Central Accounts Section) Nagpur.

Meanwhile transactions at various agency offices (RBI, SBI, Nationalized banks' branches, treasuries etc) are done without any reference to cash position of the State Govt @ CAS.



Central Accounts (CAS@ Nagpur):

Each agency bank has set up a 'Link office' in Nagpur, for fund settlement with CAS. All the financial transactions thus merge into CAS Nagpur, which work out daily cash balance of each Govt.

RBI sends daily, monthly advice of balance in its books, ways & means granted, investments made to respective Govts. This is useful for govts in preparing 'Ways & Means budgets'.



Other Services:

Besides receipt & payment of money on behalf of Govts. RBI performs other services to govts for which it may receive nominal fees, often this don't even cover costs!

Being Banker to govt RBI provides: exchange, handle forex transaction of GOI, remittance transactions, management of public debt & issue of new loans, invest surplus funds, issue & management of special funds, bonds, pension schemes, safe custody facility and act as Adviser to Govt on various Monetary & economic perspectives.


Reforms:


a) Computerization: RBI's endeavor is to help common person to pay Govt's dues at bank branch of his choice, while ensuring instantaneous credit to Govt's a/c @ RBI.

RBI & Govts are working towards computerization of dealing branches, CAS, all PAOs (Pay & Accounts Offices)/ Circle Offices of Govt/ Drawing offices/ Treasury offices.

It is envisaged that real-time settlement of funds would handle shortcomings observed in manual system of handling transactions. Reconciliation at every level will be quicker with increased accuracy.


Instead of paper scrolls, Govt depts are geared up for accepting the same in e-format. Earlier all deposits in Govt's a/cs were to be accompanied by appropriate challans. Challans were in multiple copies, different shapes, sizes. Paying taxes & accounting for same was cumbersome, time-consuming process.

With the progress in banking it is possible for assesses to pay govt's dues using single pay-in-slip. Later electronically just by quoting PAN!


OLTAS (On-Line Tax Accounting System) introduced in 2004, for collection of Direct Taxes is a step in that direction. OLTAS can be accessed through Net-banking of Agency Banks & taxes can be paid by common taxpayer in minutes.



b) Expansion in Agency Banks: At present all public sector banks & 3 private sector banks (Axis, HDFC, ICICI bank) act as RBI's agent to do Govt business.

Agreement between State Govt & RBI provide that the RBI is not entitled for any remuneration for ordinary banking operations apart from the advantages which may accrue from holding cash balances free of obligation to pay interest thereon. However minimum balances doesn't adequately compensate RBI for the cost of conducting Govt's business.


Presently 'Agency commission' is given to commercial banks by RBI. This merely covers the cost of doing the transaction. In most of the countries this cost is borne by Govts themselves.

RBI is trying to create a climate of competition for Govt Business. It's suggested that system of 'bidding' would rationalize agency charges better rather than present 'cost system'


For more information read FAQs by RBI & speech by Sh. YV Reddy (former RBI Governor).