Fake Currency in India: Get a Refund from the Bank?

New Indian currency 500 rupees notes.
••• anand purohit/Getty Images

Note: On November 8, 2016, the Indian government declared that all existing 500 rupee and 1,000 rupee notes would cease to be legal tender from November 9, 2016. The 500 rupee notes have been replaced by new notes with a different design, and 2,000 rupee notes have also been introduced.

Fake currency is a huge problem in India, and it's been exacerbated by the fact that banks have been slow to install fake currency detector machines.

As far as I know, I've never received fake Indian currency. However, some of my friends haven't been so lucky. One friend has even received a fake 1,000 rupee note, from an ATM at a bank, on more than one occasion.  It's shocking, but it shows how big a problem fake currency is in India.

If it happens to you, what can you do?

Can You Get a Refund from the Bank?

In July 2013, the Reserve Bank of India (RBI) issued a directive designed to make banks more accountable for detecting and removing fake notes from circulation. To encourage customers to hand fake notes over to the banks, rather than try to surreptitiously palm them off, the directive states that banks should accept the notes and reimburse the value as follows:

"Para 2 Detection of counterfeit notes

i. Detection of counterfeit notes should be at the back office / currency chest only. Banknotes when tendered over the counters may be checked for arithmetical accuracy and other deficiencies like whether there are mutilated notes, and appropriate credit passed on to the account or value in exchange given...

iv. In no case, the counterfeit notes should be returned to the tenderer or destroyed by the bank branches / treasuries. Failure of the banks to impound counterfeit notes detected at their end will be construed as willful involvement of the bank concerned, in circulating counterfeit notes and penalty will be imposed..."

In return, the RBI states that it will refund 25% of the amount to the banks.

"Para 11 Compensation

i. The banks will be compensated by RBI to the extent of 25 % of the notional value of the counterfeit notes of ` 100 denomination and above, detected and reported to RBI and Police authorities...."

The directive clearly makes banks responsible for detection and impounding of fake notes. Based on this, it could be expected that if you receive a fake note from a bank, you could hand it over for a refund.

The reality is, unfortunately, different though.

The wording of the directive is loose, there is no easy system in place to deal with counterfeit currency submitted to banks, banks still stand to lose 75% of the face value of the currency, and directives from the RBI are routinely flouted.

As part of the process, once a fake note is handed over to a bank, a First Information Report (FIR) must be registered at a police station. Police will then conduct an investigation into the matter. This creates a lot of legal hassle, which people and banks want to avoid. Customers must prove that they directly received the fake currency from the bank -- something that's difficult to do.

Hence, without filing a FIR with the police, if you do return a fake note to a bank in hope of exchanging it for a genuine one, it will most likely be seized and you'll be left empty handed!

Wondering how to detect counterfeit notes? Find out more, including why the problem of counterfeit currency is so huge, in this article about fake Indian currency and how to spot it.