Replacing of a banknote series require organizational and logistical planning. India as an example for a cash driven society, faces challenges when the most important banknote denominations have to be exchanged within an extremely short period of time. The INR 1000 and INR 500 notes comprise 85% of cash value in circulation, therefore each daily business transaction will be concerned by a cash payment ratio of 98%. Even for logistical planning the volumes are more than twice the volumes of the Euro introduction in 2002. One fourth of approx. 95 Billion notes have to get replaced by new note series of INR 500 and INR 2000 notes; hence 20 Billion notes will have to get issued to replace the old notes by the end of 2016. In previous times the four governmental printing plants (SPMCIL) produced around 23,6 Billion notes p.a. (2014); for comparison the FED or ECB places annual print orders of 6 to 8 Billion notes for USD and EUR. This explains the organizational risks for the Reserve Bank of India (RBI) and all other commercial players involved in the cash cycle after the unannounced demonetization of INR 1000 and INR 500 note denomination by the government.
Planning of new banknote series
National Central Banks (NCB) are challenged not only by casual counterfeiters, but also by sophisticated counterfeiting syndicates producing high-quality imitations using the latest printing technologies. These threats mean that banknote series need to be revised or upgraded, on average every six to eight years.
Planning of new banknote series has to consider core activities:
- Define and balance the design policy for the new series, including decisions about note substrate and set for security features. These factors determine future note durability, resilience against counterfeiting and usage in daily life. The security features are key authentication element for general public (level1), for commercial sector with machine-readable, semi-covert features for banknote recirculation (level 2), and for Central Bank with dedicated add-ones (level 3).
- Adjust technical and organizational compliance with production process and cash logistics. The printing works will do zero production run to fulfill final quality tests of the Central Banks. In addition, higher printing and logistical capacities along the supply chain have to be planned and are essential for in-time delivery of new series to the general public without interference.
- Ensure interoperability of new notes within cash handling equipment and daily cash processes in commercial sector. This includes communication and training to involved parties, especially in banking, retailers, CiTs to be prepared in good time. In case automation systems are concerned the ATMs, cash recyclers, cash tills, ticketing and vending machines, and banknote processing systems have to be adapted to new note series, means e.g. sensor recalibration with adapted currency data files to recognize new security features, physical adaptations to ATM cassettes and other transport units in case of different note sizes and thickness.
- Ensure reliability of cash handling and destruction processes. The co-circulation of two different banknote series causes additional tasks in cash operations. For example the old banknotes have to be faced out of circulation and needs additional stackers and store-room at each processing station, in cash tills, in branch vaults, in cash centers until pick-up and transport to Central Bank for destruction. The co-circulation of mixed banknote substrates (paper and polymer) bears in mind different friction characteristics for automated processing, especially for singling process in high-speed processing machines and ATM dispensers. Non-homogenious substrate compositions of unfit notes - whether the banknote is cotton, polymer or hybrid - requires adaptations of destruction process by separating shredding and briquetting infrastructure in Central Bank’s cash centers.
The Bank of England (BoE) facing this challenge since issuing a new polymer note series, starting with the GBP 5 banknote in September 2016 in parallel to the former cotton series.
[More detailed information in „Fit for circulation: The future life cycle of currency to 2026“, Jens Eberhardt, Smithers Pira 08/2016]
Future-oriented Central Banks will consider these environmental and infrastructural factors starting with a life cycle analysis. A NCB centric approach should be extended by an impact assessment encompassing the full cash cycle - including cost of training and adaptations for automated cash infrastructure , e.g. ATMs, ticketing and vending machines, and banknote processing equipment for cash centers. Nowadays, operational research models are available for managing such analyses with multiple open parameters.
In this respect the ECB informed all commercial players and the general public about the Euro introduction 2002 in best time; so everyone was able to prepare their cash infrastructure for such currency exchange. India is following now a big bang procedure by announcing sudden demonetization of the two highest banknote denominations. The short interchange period within 2 weeks timeframe at commercial banks, and at RBI branches until March 2017 exposes obviously logistical gaps in the supply chain. This engrave decision is part of a governmental modernization and anti-corruption initiative for India. The government outlined to introduce a new INR 1000 note within the next months.
Bank for International Settlements, Cash InfraPro analysis