LEGAL TENDER AND CLEAN MONEY POLICY

22nd May, 2023 Economy

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Context

The RBI has decided to withdraw ₹2,000 notes from circulation, but it has specified that these will continue to be legal tender.

Why has the RBI withdrawn Rs 2000 notes?

The Rs 2000 note was introduced in November 2016 under Section 24(1) of The RBI Act, 1934, primarily with the objective of meeting the currency requirement of the economy expeditiously after the legal tender status of Rs 500 and Rs 1000 notes was withdrawn. With the fulfilment of that objective, and once notes of other denominations were available in adequate quantities, the printing of Rs 2000 notes was stopped in 2018-19.
The RBI issued the majority of the Rs 2000 denomination notes prior to March 2017; these notes are now at the end of their estimated lifespan of 4-5 years. This denomination is no longer commonly used for transactions; besides, there is adequate stock
In view of the above, and in pursuance of the ‘Clean Note Policy’ of the Reserve Bank of India, it has been decided to withdraw the Rs 2000 denomination banknotes from circulation.

What is the Clean Note Policy?

The Clean Note Policy seeks to give the public good-quality currency notes and coins with better security features, while soiled notes are withdrawn out of circulation.
The RBI had earlier decided to withdraw from circulation all banknotes issued prior to 2005 as they have fewer security features as compared to banknotes printed after 2005.
However, the notes issued before 2005 continue to be legal tender. They have only been withdrawn from circulation in conformity with the standard international practice of not having notes of multiple series in circulation at the same time.

Legal Tender

Legal tender refers to a form of currency that can be in the form of a coin or a banknote that is recognized by law as an acceptable means for settling debts or obligations.
The Government of India issues coins under Section 6 of The Coinage Act, 2011, which are considered legal tender for making payments or settling accounts, provided that the coins are undamaged and meet the prescribed weight requirements.
Coins with denominations equal to or higher than one rupee can be used as legal tender for amounts up to one thousand rupees. Additionally, fifty paise (half a rupee) coins can be used as legal tender for amounts up to ten rupees. It is important to note that while individuals cannot be compelled to accept coins beyond these specified limits, there are no restrictions on voluntarily accepting coins for amounts exceeding the mentioned limits.
Similarly, banknotes issued by the Reserve Bank of India, such as Rs 2, Rs 5, Rs 10, Rs 20, Rs 50, Rs 100, Rs 200, Rs 500, and Rs 2000, are legal tender throughout India and can be used for making payments or settling accounts based on the amount stated on the banknote.
These banknotes are guaranteed by the Central Government, as per the provisions outlined in sub-section (2) of Section 26 of the RBI Act, 1934. Additionally, Rs 1 notes issued by the Government of India are also recognized as legal tender.
However, it's worth noting that the Rs 500 and Rs 1000 banknotes from the Mahatma Gandhi series, issued up until November 8, 2016, are no longer considered legal tender as of midnight on November 8, 2016. [Due to demonetization]

Legal tender and currency are distinct concepts

Currency encompasses various forms of money used for transactions, while legal tender refers to a specific subset of currency that holds legal recognition as a legitimate payment method
When it comes to settling debts, a creditor is legally bound to accept legal tender as a valid form of payment. However, creditors retain the discretion to accept alternative forms of payment, such as credit or barter, if they so choose.
The purpose of legal tender laws is to foster economic stability by establishing a universally accepted medium of exchange. These laws ensure that there is a common currency that is recognized and acknowledged by all participants in the economy.

Difference between legal tender and fiat money

Legal tender is a currency that is declared legal by the government of that particular nation, whereas fiat money doesn’t hold any intrinsic value.

S. No.	Legal Tender	Fiat Money
1.	A currency that is declared legal by the country’s government and holds an intrinsic value	A currency that is backed by the government and doesn’t hold any intrinsic value.
2.	Legal tender is set as a standard for repaying debts.	The value of fiat money is maintained by the relationship between the demand and supply in the economy.
3.	It is backed by assets like gold.	It is not backed by any asset but by the government.

Importance of legal tender money in India

Legal tender is used by the market players as a way to carry out the indirect exchange, as a unit of account, as a store of value, as a mode of deferred payment, standard to perform the functions of money in the economy.
There is increased flexibility in the chain of money supply if a single currency is used as legal tender and eliminates the transaction costs linked to the usage of multiple competing currencies.
Legal tender makes the making of monetary policy possible.
It facilitates the issuance of fiduciary media by the banking system to meet trade needs.

So, will the Rs 2000 banknotes continue to be legal tender?

The Rs 2000 banknote will continue to maintain its legal tender status, the RBI has said.
Members of the public can continue to use Rs 2000 banknotes for their transactions and also receive them in payment. However, they are encouraged to deposit and/ or exchange these banknotes on or before September 30, 2023.

KEY POINTERS

Can coloured, stained, or scribbled notes be counted as legal tender?

All the coloured, stained, or scribbled notes continue to be legal tender, provided they are still decipherable. They can be deposited or exchanged at any branch of the bank.

Are coins accepted in all transactioens as legal tender?

As per the instructions of the RBI, banks are required to accept coins in all transactions and exchanges as legal tender.

What happens to the bank notes of older designs when new designs are introduced in the market?

Both old and new design notes coexist in the market. Gradually, the circulation of old design notes decreases, whereas new design notes circulate more.

What are the legal provisions that deal with forged notes?

Sections 498A to 498E of the Indian Penal Code (1860), along with the High-Quality Counterfeit Indian Currency Offences Rules, 2013 under the Unlawful Activities (Prevention) Act (UAPA), 1967, deal with the offences against forged notes.

Are Cryptocurrencies considered Legal Tender?

Cryptocurrencies are not commonly admitted for usability as money as they are not legally recognised in many countries across the world.
El Salvador is the first country that has made Bitcoin a legal tender.
The Central African Republic (CAR) became the second country after El Salvador to adopt Bitcoin as their legal tender.
However, India has been working on various laws that can be issued for the regulation of cryptocurrencies in India, but no solid draft has been issued yet or released publicly.

PRACTICE QUESTION

Q. Consider the following statements:

1. Legal tender is a currency that is declared legal by the government of that particular nation, whereas fiat money doesn’t hold any intrinsic value.

2. Cryptocurrencies are not recognized as Legal Tender in any part of the world.Which of the above statements is/are true?

Which of the above statements are correct?

(a) Only 1

(b) Only 2

(d) Neither 1 nor 2

Correct Answer: A- Only 1