The Centre fears that a huge numbers of fake currency notes of old Rs500 and Rs1,000 denomination may have found their way into the District Cooperative Central Banks (DCCB) as these banks are neither supervised by the Reserve Bank of India nor do they have the technology to detect fake currency notes.

There are 371 DCCBs spread across 20 States with over 14,060 branches.

On Friday, the Supreme Court had pulled up the Centre on its failure to address the problem faced by the DCCBs, seen as a major link in supplying credit to farmers, small industries, and rural areas. Till November 13 customers were allowed to exchange their old Rs500 and Rs1,000 currency notes at these banks.

Within five days, between November 9 and 13, these banks witnessed deposit of old currency notes worth several thousands of crores. Since these banks do not have any mechanism to detect fake currency notes, the RBI got alerted about such huge deposits in them.

To make things worse, their customers are not KYC-compliant, and the management of such banks rests solely with the State Governments with no exclusive supervision by the RBI.

As a result, the RBI issued a circular on November 14 stopping any further deposit of old Rs500 and Rs1,000 notes at DCCBs. Even the cash they collected was not accepted by the State Treasury chest, a situation that forced them to approach the apex court.

The affidavit given by Department of Economic Affairs, Ministry of Finance to the Supreme Court on December 1 explained that the entire effort behind demonetisation was to flush out the fake currency from the system. “Fake notes are found to be more in the denomination of Rs500 and Rs1,000…DCCBs as institutions, have low level of automation as also low order professionalism among their staff...The DCCBs are deficient in ensuring KYC norms and thus, their capability to detect Fake Indian Currency Notes (FICN) not adequate. These, therefore have been some of the reasons, which prompted the authorities (RBI and Centre) to keep them off from exchanging the specified bank notes for public or accepting them for deposit to the credit of their customers’ accounts.”

The Centre has its fingers crossed as it may turn out to be a humungous exercise to determine how much of money deposited with DCCBs is fake.

A study by the Indian Statistical Institute early this year estimates that the fake currency note market could be worth about Rs400 crore of which fake Rs1,000 notes alone constitutes about 50 per cent of the total value. This fact is contained in the Centre’s affidavit too. But the Centre has assured the court that the RBI decision to restrict DCCBs from collecting cash or transacting cash to its customers will not affect individual customers, who are few compared to the bulk constituted by institutional customers.