DECEMBER 11, 2016

By Naresh Minocha, Consulting Editor

DEMONETIZATION has turned torchlight on alarming loopholes in India's currency defences. This calls for a thorough check of successive Governments' failure in producing secure, easily authenticable and forgery-resistant currency.

The independent probe should also study mismanagement of demand and supply of currency as evidenced by serpentine queue of citizens outside banks/ATMs and associated tragedies.   

The review should serve as foundation for launch of a 'Make In India' mission to indigenize the entire value chain from developing bank note design software to detection of counterfeit notes.

Forgers have repeatedly certified the Government's failure on the currency front, which has a direct bearing on the national security. They have produced and pumped into market fake Rs 2000 notes, even as countless citizens were praying for an opportunity to touch and feel the new notes.

The new notes are akin to old wine in new bottle as they are bereft of new security features, which are the key to keep counterfeiters at bay. As admitted by the Government in Parliament, the new series bank notes are merely "different from the old ones in terms of look, design, size and colour".

Facts are too strong to shatter the myth that demonetization is essential to fight counterfeiting of high denomination notes and their usage by terrorists.
The first basic fact is that the printing of new notes is ill-timed. This is because Reserve Bank of India's (RBI's) subsidiary, Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), is not geared to produce next generation of notes.

It is in thick of technology acquisition-cum-modernization & backward integration exercise.

As admitted by RBI in its annual report for 2014-15, "the Reserve Bank depends largely on imports for the main ingredients required for printing currency. In case of inks, India produces Offset and Intaglio ink while Optically Variable Ink is imported. Some of the security features, such as security thread and water mark used in the current series of banknotes are also imported. With regard to the paper used for banknotes, India produces only 5 per cent of the paper required annually for currency note printing, necessitating import of the rest. Dependence on imports makes the printing process of currency vulnerable in terms of price, quantity and timeliness."

From the standpoint of forgery, the entire process of substituting 85% of notes in circulation with new ones (without any new security elements) is scandalous waste of the Nation's resources including the citizens' time and life.

The thumb rule of currency management for RBI has to be that it should always be a few steps ahead of counterfeiters. This is because design & production of new notes takes several years. And both RBI and Finance Ministry have been moving at snail's pace in this area, thereby lengthening the cycle for creating new generation of currency.

The best proof of this ham-handedness is the manner in which the Government has repeatedly belittled for 17 years the option of utilizing plastic notes to outsmart fraudsters! More of this later.

Even the half-hearted project for import Rs 10 plastic notes for field trial, mooted in 2009, has proved to be a non-starter. In November 2015, Modi Government advised RBI to invite fresh bids for supply of these notes.

Ask an internet-savvy school drop-out about plastic notes. He would in all probability flood the Finance Ministry with documents establishing virtues of polymer as substrate for printing imitation-resistant notes. There is global shift towards this innovation. More than 30 countries have already changed over to plastic notes.

As put by Bank of England, "techniques required to produce high quality counterfeit polymer banknotes are slow, expensive and require a high level of effort and technical expertise. The machinery and techniques required are also different, for example standard desktop printers are designed to print on paper, but not on polymer film. Combined this presents a significant barrier to counterfeiters."

A comparative Study of paper and polymer  bank notes has concluded similarly: "polymer offers an alternative, unique and more secure substrate for banknotes through its complex window structures which act as a platform for integrating high security features, not available to paper banknotes, making counterfeiting much more difficult."

The 179-page study aptly captioned 'Supremacy of Polymer Banknotes' was published by Saudi Arabia's Naif Arab University for Security Sciences in 2012.
Another fact, not known to many, is that counterfeit currency has been liberally distributed through bank chests and ATMs. Moreover, the banking system has lax norms & inadequate resources to detect fake notes & safeguard genuine notes.

One of the most shocking cases of counterfeit rupees aggregated to Rs 4.02 crore was noticed in 2008 at State Bank of India's Dumariyaganj branch in Sidharth Nagar district of Uttar Pradesh adjoining Nepal. Rs 70 lakh was also missing from the chest.

The case was unearthed by UP Police's special task force, which urged RBI to conduct thorough inspection of the bank chest at the Branch. It is here pertinent to note that money stored in bank chest across the country is classified as RBI's reserve money. The buck on forgery thus stops at RBI.  

After this case, about half a dozen cases of fake currency lying in bank chests maintained by different banks have been reported in the media in the recent years. A notable reported case is that of  fake notes totalling Rs 10.77 crore deposited in ICICI Bank's different branches in UP and Uttarakhand during between 2006 to 2014. This version is the reported claim made by ICICI in its First Information Report filed with police in Lucknow.

Similarly, there have been instances of customers getting fake notes from ATMs. These cases shouldn't be treated as small aberration in the currency chain. They might well constitute a pattern in fake notes business.

Even a layman would grasp the complexity of counterfeiting instead of believing Modi Government's jingoism linking forgery only with terrorism and Pakistan. Start with technology acquisition and modernisation. Take the case of import of security features for new series of high denomination notes.

Finance Ministry solicited global expression of interest (EOI) for this vital ingredient of currency in 2008. It re-invited EOIs in 2009. It repeated this initiative in 2010! There is nothing in the public domain to show that these efforts fructified.  

What we know is that RBI initiated an exercise to procure 11 security features (along with technology transfer) in June 2015.  The features include security thread, security fibre, advanced watermark and colour-shifting ink.

It is interesting to find that in May 2015, RBI subsidiary, BRBNMPL, had separately invited bids for manufacturing and supply of Colour Shift Security Thread for production of Cylinder Mould Vat Made Watermarked Banknote (CWBN) paper for Rs.100, Rs.500 & Rs.1000 notes.

In December 2015, RBI excluded security fibre from the tendering competition dated June 19, 2015 and invited separate bids for fibre. Put simply, Govt-RBI combine is trapped in acquisition mode for security features since 2008!

Says RBI in its annual report for 2015-16, "While in India, the last such up-gradation(of security features) was done in 2005 with a new 2005 series of banknotes, certain new features such as bleed lines and exploding numbers were introduced during 2015-16. Furthermore, the Government of India approved the procurement of new security features for Indian banknotes. The process of procurement of new security features is presently underway while banknotes with new designs are also proposed to be introduced."

Turn now to inks. In June 2015, BRBNMPL invited offers for supply of technology for manufacturing offset, intaglio, numbering and other inks at is proposed ink factory at Mysuru in Karnataka. BRBNMPL currently procures these products from the market.

In February 2016, the company also initiated an exercise to scout for and short-list original software developers for bank note design software. This reflects poorly on Digital India-Skill India rhetoric. BRBNMPL has also taken certain other initiatives to strengthen its capability to produce notes of desired specifications and quality.

Like BRBNMPL, the country's second notes printing company, Security Printing and Minting Corporation of India Limited (SPMCIL) has also been grappling with upgrading challenges.

The former company accounts for 60% of total notes printed in a year, with the balance 40% being the share of the latter company.

SPMCIL's operational deficit came to the fore in December 2015 when RBI found that it had printed several Rs 1000 notes without security thread on paper made in-house. Even counterfeiters would not commit such blunder!

To increase the production of Rs 20 & 50 notes, SPMCIL has dispensed with Intaglio ink embossing from them – a security and quality compromise.

It would be interesting to find where India is slotted if a global study is conducted to benchmark the quality and safety of national currencies and operational efficiency of presses & mints. International Association of Currency Affairs (IACA), which gives annual awards for different attributes of currency, should create a global currency rankings index.   

All this brings us to the inordinate delay in taking India's currency production technology to a different footing. The delay has occurred due to Government's inability to shift from paper notes to plastic notes.   

Way back in October 1999, the Government had constituted a committee of experts to study prospects of printing notes on polymer/plastic substrate. Both the Committee & RBI concluded this proposal was unsuitable.

This conclusion defies common sense when viewed against the fact that Australia, which pioneered plastic notes in 1988, had completely switched over to this new-generation currency in 1998.

More than 30 countries have switched over to polymer notes. Notwithstanding this fact, both NDA and UPA have had the audacity to belittle plastic notes. Modi Government told Lok Sabha on 28th November 2014 that "The primary objective of introduction of polymer/plastic notes is to increase its life and not to combat counterfeiting."

Similarly, Manmohan Singh Government told Lok Sabha on October 17, 2008 that "there is no established co-relation between counterfeiting and the material of banknote, either paper or polymer."

If Prime Minister Narendra Modi had learnt the fascinating story of how & why Australia developed trail-blazing technology, he might not have marketed demonetisation as a tool to fight counterfeiters and financing of terrorists with fake notes.

Mr. Modi might have instead pitched for 'Make in India' plastics notes project.  

Australia's Commonwealth Scientific and Industrial Research Organisation (CSIRO) started research work on polymer notes in 1968 following a request from Reserve Bank of Australia (RBA) to find scientific solution to counterfeiting menace.

To thwart counterfeiting, CSIRO developed currency elements called Optically Variable Devices (OVDs), which are embedded in thin special-grade plastic film on which currency is printed. OVDs alter their appearance in response to external stimulus, which can be slight pressure, new viewing angle, etc.
As put by CSIRO, "Australia's introduction of plastic banknotes with optically variable devices (OVDs) was a world's first and represented a paradigm shift towards a currency secure against forgery."

In 1996, RBA formed a joint venture with Innovia Films of the UK to produce plastic films required for notes. In 2013, RBI divested its 50% stake in JV named Securency International Pty Ltd to Innovia.

It produces a special-grade base film from category of films named biaxially oriented polypropylene (BOPP), which have a wide range of applications of which the most popular one is food packaging. The base film branded as Clarity is later combined with opacification print layers and security features and marketed as value-added film under brand Guardian.

The company says: "Innovia Security today is an organisation unified in its vision of making Guardian the leading solution to banknote counterfeit prevention."

It claims that 99% of plastic notes are of Guardian make. It also has proprietary fake plastic notes detection gadgets.

This brings us to the need for crafting a 'Make in India' plastic notes project by pooling existing manufacturing & technological skills and by import of technology, if need be.

The Government should launch a 5-yr mission to design, develop and launch plastic notes with a mix of indigenous and imported technology. The mission should be launched under the aegis of RBI with experts drawn from different domains and entities.

Take the case of plastic film required for manufacturing specific grade for printing rupees. The country has requisite commodity polymer production expertise with companies like Reliance Industries Limited, GAIL and Indian Oil Corporation. We also have plenty of industrial expertise in the downstream arena of plastic films including BOPP.

To shorten the gestation period in this arena, the Mission can consider acquiring a few patents that have not been commercialized for developing plastic films for notes printing.

A similar approach can be adopted for other elements of plastic notes such as printing inks, OVDs and digital equipment for authentication of plastic currency.

The ball is in Mr. Modi's court to walk the talk on Make in India and countering Counterfeiting.