RBI Master Direction on Note Sorting Machines (October 2026): Fitness Limits, Quarterly Testing and the 30 June 2027 Phase-Out

Any bank still running a note sorting machine that has gone out of production has until 30 June 2027 to retire it, and a penalty is attached if the date is missed. That deadline sits inside a new Master Direction that the Reserve Bank of India issued on 2 October 2026. The Direction also gathers the fitness limits for banknotes, the authenticity rules and the quarterly testing routine into one document, and withdraws five earlier circulars. For currency chest, operations and compliance teams, this is now the single source for how a sorting machine must treat a note.

Quick Reference

What Changed?

The covering letter says the Master Direction incorporates and updates the extant guidelines, circulars and directives so that banks have "all current instructions on Note Sorting Machines at one place". The five circulars it replaces stand withdrawn from the date of issuance. The document does not set out a clause-by-clause comparison with the earlier circulars, so the table below records only what the source itself supports.

Who Must Comply With the Master Direction?

What Does the Master Direction Require? Provision-by-Provision Analysis

Section 1: Introduction and background

The Direction traces the history of the framework. NSM installation guidelines were issued by circular dated November 19, 2009, advising that these machines should conform to standards prescribed by RBI from time to time. Draft guidelines on "Note Authentication and Fitness Sorting Parameters" were published on December 23, 2009. Final guidelines followed by circular dated May 11, 2010. After the new series banknotes were introduced, the parameters were reviewed and a revised set issued by circular dated July 01, 2022.

Section 2: What is a fit note?

• Fit note (2.1): A genuine note that is sufficiently clean for its denomination to be readily ascertained and therefore suitable for recycling.
• Unfit note (2.1): A note not suitable for recycling because of its physical condition, or one belonging to a series phased out by RBI.
• Every parameter counts (2.1): All fitness parameters are evaluated individually, and a note must pass all of them to be considered fit for recycling.
• Minimum standards (2.2): The parameters are the minimum standards for cash handling machines used by banks. Notes can only be recycled or reissued if evaluated as genuine and fit under them.
• Authenticity first (2.2): Authenticity check is a prerequisite for fitness sorting, and fitness sorting can be done only on genuine notes. Machines shall identify and segregate suspected counterfeits and unfit notes "in a reliable and consistent manner".
• Phased-out series (2.3): Notes of a series that RBI phases out, though considered legal tender unless otherwise specified, are unfit for reissue. When RBI phases out a specific series of a specific denomination, machines shall sort all such notes as unfit irrespective of physical condition.

Sections 3 and 4: Applicability and authenticity check

Section 3 applies the parameters to machines operated by banks, directly or through agents, covering both sorting machines and authentication-only machines. Under Section 4, machines shall perform the authenticity check against the features of genuine notes as disclosed by RBI on its website from time to time. Any note that does not have all the features of a genuine note shall be classified by the machine as suspect / reject.

Section 5: What makes a note unfit? Fitness sorting limits

Section 5 lists ten defect types in Table 1 and then gives the threshold for each. The table below pulls the numerical limits together for quick reference.

Soiling levels by denomination (Table 2)

Notes exceeding these levels shall be sorted as unfit. Soiling measures the loss of reflectivity from the unprinted areas due to dirt, ageing (yellowing), wear and extraneous markings, and it includes decolouration due to ageing, excessive folding and other wearing.

Table 2 covers ₹5 to ₹500. The Direction does not state soiling levels for any other denomination.

Tear limits (Table 3)

*For diagonal tears, the length is measured by drawing a straight line from the peak of the tear to the edge of the note where the tear begins (a rectangular projection), rather than measuring the length of the tear itself. A note exhibiting at least one tear at the edge is classified as having tears, and notes with tears larger than the Table 3 sizes shall be sorted as unfit.

The source does not say whether a tear must exceed both the width and the length in Table 3, or either one, to make a note unfit. Banks should confirm how their machine and supplier specifications apply the limit.

Points on graffiti, repairs and limpness

• Graffiti exception: Non-permanent markings such as pencil scribbles that do not obscure the banknote may not be classified as unfit, subject to the note passing the reflectance and optical density criteria. The word is "may", so the exception is permissive.
• Repairs: A repaired note is one created by joining parts of the same note with extraneous matter such as tape, paper or glue. Notes meeting any one of the four repair thresholds are sorted as suspect / reject. The source does not say how a repaired note below all four thresholds is treated, other than that Table 1 lists repair as a fitness feature.
• Limpness: The Direction gives no separate numerical test. Paper quality detectors are to be adapted to the same level as for soiling.

Section 6: Mutilated, imperfect, mismatched and built-up notes

Notes defined as mutilated, imperfect, mismatched or built-up in the Note Refund Rules (NRR 2009, amended in 8 December 2018, as worded in the source) shall be classified as suspect / reject. All suspect / reject notes shall be subjected to manual inspection for any wrongdoings.

Section 7: How often must note sorting machines be tested?

Banks shall ensure that note sorting machines are tested for accuracy and consistency on a quarterly basis and recalibrated if required. A certificate signed by bank officials to this effect shall be maintained for records. The Direction adds that a periodicity of quarterly testing "as per the Format attached, may be followed". On a plain reading, the quarterly test is mandatory because of the "shall", while the attached format is suggested; the Direction does not say so expressly.

Section 8: BIS standards, phase-out and procurement

• BIS standard (8.1): After consultation with RBI and other stakeholders, the Bureau of Indian Standards published the standard for Note Sorting Machines, IS 18663: 2024, in the Gazette of India on March 19, 2024. The Direction points to the BIS website for the standard and for lists of BIS-certified models (separate links for domestic and foreign manufacturers).
• Phase-out (8.2): NSM models deployed at banks that have been discontinued from production shall be phased out on or before June 30, 2027.
• Penalty link (8.2): The Direction says the timeline "may be strictly adhered to", failing which penalties would be levied for non-adherence in terms of the Master Direction on "Incentives for Currency Distribution and Exchange and Penalties / Penal Provisions for Bank Branches and Currency Chests for Deficiency in Rendering Customer Service and Reporting of Transactions / Balances" (Updated as on May 27, 2026). The phase-out itself is stated as a "shall" requirement. The amount of any penalty is not stated in this Direction.
• Procurement (8.2): "Going forward", banks shall only procure BIS-certified Note Sorting Machines.

Which Old Circulars Are Withdrawn?

The Annex lists five circulars that stand withdrawn from the date of issuance of the Master Direction, October 02, 2026: the circulars dated 19.11.2009, 11.05.2010, 01.07.2022, 30.10.2024 and 24.04.2025. The full list is reproduced at the end of this article. Banks should replace references to these circulars in their policies and procedures with RBI/DCM/2026-27/473.

When Does the Master Direction Apply?

The Direction states no separate effective date and no transition period for Sections 2 to 7. The covering letter withdraws the five earlier circulars from the date of issuance, so the prudent reading (editorial) is that banks should treat those requirements as applicable from October 2, 2026. The source does not say whether the June 30, 2027 date is new or carried over from the April 24, 2025 circular on BIS standards, which is titled "Revised Timeline for Implementation" and is now withdrawn.

Are There Any Exceptions?

The Direction states no exemption for any category of bank and no exception from the quarterly testing or phase-out requirements. Limited carve-outs sit inside individual parameters: non-permanent pencil markings that do not obscure the note may escape the graffiti rule, and a denomination missing from the quarterly test deck may be replaced by other available denominations and run separately.

What Is the Practical Impact for Banks?

In practice, this means three workstreams. The first is machine inventory: every NSM in the network, including those run by outsourced agents, needs to be classified as BIS-certified, discontinued from production, or neither. The second is configuration: machine thresholds for soiling, tears, holes, stains, folds and repairs have to match the numbers in the Direction. The third is records: quarterly test reports, signed by the supplier, operator and a bank official, need to exist for each machine.

For compliance teams, the immediate issue is the 30 June 2027 date. A bank with discontinued models in the field needs a replacement budget, a procurement route limited to BIS-certified machines, and a roll-out calendar that finishes before the deadline. The Direction links non-adherence to penalties under the currency chest penal framework, so the replacement plan is also a penalty-avoidance plan.

In our assessment, two areas may cause friction. Matching a machine's built-in sorting limits to the Direction's figures may need supplier involvement and re-calibration. And banks with machines at agent-run or outsourced sites may find it harder to evidence the quarterly signed test reports, since the Direction extends to machines operated indirectly by agents.

Compliance Checklist

The Master Direction is final and live, so the checklist applies. Items marked "editorial suggestion" are not stated in the source.

Frequently Asked Questions

What is the RBI Master Direction on Note Sorting Machines?

It is RBI/DCM/2026-27/473, dated October 02, 2026, which brings together RBI's instructions to banks on note authentication, fitness sorting, machine testing and BIS standards for Note Sorting Machines, and withdraws five earlier circulars.

Which banks must follow it?

The Direction is addressed to All Banks. It applies to machines that banks operate directly through staff or indirectly through agents.

What is the deadline to phase out old note sorting machines?

NSM models deployed at banks that have been discontinued from production shall be phased out on or before June 30, 2027.

What is the penalty for missing the June 30, 2027 deadline?

The Direction says penalties would be levied for non-adherence under RBI's Master Direction on incentives for currency distribution and exchange and penal provisions for bank branches and currency chests (updated as on May 27, 2026). It does not state the amount.

Can banks still buy non-BIS-certified note sorting machines?

No. The Direction says that going forward banks shall only procure BIS-certified Note Sorting Machines. The BIS standard is IS 18663: 2024, published in the Gazette of India on March 19, 2024.

How often must note sorting machines be tested?

Banks shall test note sorting machines for accuracy and consistency on a quarterly basis and recalibrate them if required. A certificate signed by bank officials must be maintained for records.

What is the tolerance level in the quarterly test?

The acceptable tolerance for fitness checks is 5%, and tolerance for FICNs (fake Indian currency notes) is zero. If discrepancies arise, the machine supplier shall be advised to re-calibrate the machine.

When is a banknote considered unfit under the Master Direction?

A note is unfit if it fails any one fitness parameter, including soiling, limpness, dog-ears, tears, holes, stains, graffiti, crumples or folds, and decolouration. A note must pass every parameter to be fit for recycling. Notes of a phased-out series are unfit irrespective of physical condition.

What happens to suspect or rejected notes?

Suspect / reject notes shall be subjected to manual inspection for any wrongdoings. Notes with mutilated, imperfect, mismatched or built-up status under the Note Refund Rules are classified as suspect / reject. Repaired notes meeting any of the four repair thresholds are also sorted as suspect / reject.

Which earlier circulars are withdrawn?

Five circulars dated 19.11.2009, 11.05.2010, 01.07.2022, 30.10.2024 and 24.04.2025 stand withdrawn from the date of issuance of the Master Direction, October 02, 2026.

CorpLawUpdates Analysis

This Direction is mostly a consolidation, but the 30 June 2027 phase-out for discontinued models, linked to penalties for non-adherence, is the date that matters most for banks. Three points deserve attention.

• The hardware date matters more than the parameters. Machine thresholds can be re-calibrated by a supplier. Replacing a discontinued model needs budget, vendor lead time and installation across branches and chests, all before 30 June 2027.
• Ambiguities need a documented reading. The tear limits do not say whether both dimensions must be exceeded, the repair rule is silent on repairs below the thresholds, and soiling levels are given only for ₹5 to ₹500. Banks should record the interpretation they adopt with their machine supplier.
• Evidence will be the test. The quarterly signed report and the 5% and zero-FICN tolerances are the items an inspector can verify directly. A clean file of quarterly reports for every machine is the most practical protection.

Practitioners should also watch the BIS list of certified models, since the procurement rule depends on it, and any further RBI communication on the penalty framework referred to in para 8.2. The source does not indicate whether either will change.

Annex: List of Circulars Withdrawn