Why asset backing is required for the issue of bank notes?

What is the present asset backing requirement for issue of bank notes in India? 1.3 The Act requires that:a) the issue of Bank notes should be conducted by the Bank in an Issue Department which shall be separate and kept wholly distinct from the Banking Department and the assets of the Issue Department shall not be subject to any liability other than the liabilities of the Issue Department. b) the assets of the Issue Department shall consist of gold coin, gold bullion, foreign securities, rupee coin and rupee securities to such aggregate amount as is not less than the total of the liabilities of the Issue Department. c) the liabilities of the Issue Department shall be an amount equal to the total of the amount of the currency notes of the Government of India and Bank notes for the time being in circulation.

Q2. What are backing assets? To back their banknote issue, authorised banks may use a combination of Bank of England banknotes, UK coin and funds in an interest bearing bank account at the Bank of England. Bank of England banknotes held as backing assets may be held at an authorised location or at the Bank of England. Banknotes held at the Bank may include 1 million notes (Giants) and 100 million notes (Titans), which in physical terms are permanently held at the Bank. These backing assets would be used in the event that the Bank had to implement a Note Exchange Programme.

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