NACH - National Automated Clearing House
NACH full form is National Automated Clearing House. NACH is the centralised web-based payment solution that helps the banks, corporate sectors, government and other financial institutions to handle bulk payments. High volume transactions such as dividend and salary pay by the corporate, subsidies and pensions payment by the government and such can be easily done through NACH. The system will also assist the financial institutions and corporate to receive high volume payments as well. High volume payments that consist of water, electricity, telephone bills, loan amounts, EMIs, mutual fund investments payments can be received through NACH solution.
The system is launched by National Payment Corporation of India, also known as NPCI. The solution will facilitate all kind of interbank, electronic transfers for bulk volume payments in easy ways. Through NACH the any payment can be made through ECS irrespective of the geographical location of the banks across the nation.
Payment Systems in India
Payment System in India is authorised and implemented by the Reserve Bank of India. The payment system is a solution through which the central bank of the country has allowed core banking through electronic solution. There are Net and Gross payment system by RBI. Reserve Bank has left no stone unturned to facilitate diverse methods of payment system to assist banking and transactions across the nation. RTGS is one such Gross Payment System.
Electronic transfers allow one to transfer bulk volume money hassle free through electronic payment solution. Currently more than 75% of the total transaction across the nation is done by online payment system only. Now with innovation of new and advanced technology the RBI has allowed mobile banking and online banking for the high volume payments anywhere in the country.
Plastic money is also an important part of payment system in India today. It largely overshadowed paper transactions in most of the parts of the nation. Debit cards and Credit Cards are the example of plastic money in India.
Examples of Payment Systems in India
Reserve bank of India has initiated both Gross and Net payment system in India. Real Time Gross Settlement or RTGS is the example of Gross payment settlement in India. In RTGS the payment is made through online system and by Real Time it shows that the payment will be made then and there. These payments are made for the gross settlements.
In case of Net payment system, there is National Electronic Fund Transfer (NEFT) is a common and takes place more often in India for high volume payments. It is a one-to-one payment system that allows one to pay for services or products. This is a time consuming method though it takes less time than other methods, but it has some steps through which the payment is channelized.
Debit card and credit cards, as mentioned are the examples of plastic money in India. Most of the shops, retailers, online shopping portals have point of sale equipment to collect payment through credit and debit cards. One can also pay for utilities through the plastic money as well.
Electronic Clearing Service is another mode of Net payment system is India. NACH is replacing the ECS for Credit as well as Debit.
Regulation of Payment and Settlement Systems in India
In 2007, the Payment and Settlement systems started by the Reserve bank of India under the Payment and Settlement Act. It was a big step taken by the Indian government to encourage e-payment or online transaction in the nation. It was declared by the Governor of India that the regulation will be completely handled by the Reserve Bank of India. The entire supervision, regulation and activities of the Payment and Settlement System in India is regulated and handled by RBI only. There are some basic instruction and information that commercial banks have to consolidate regarding the confidential information of the customers. Apart from these basics the entire regulation is maintained by the Reserve Bank of India.
Looking at the current scenario of online payment services, the central bank of the nation has also facilitated Non-banking Financial Corporations to involve in e-payments. There is a number of NBFCs and other financial institutes that are also allowing NEFT and other payment and settlement system.
National Payments Corporation of India
National Payment Corporation of India as known as NPCI has incorporated in the year 2005. The organisation was set up in the supervision of the central bank of India that is Reserve Bank of India. RBI has initiated the idea of setting up the NPCI with the objective of encouraging Retail Payment System in the nation.
NPCI has formed to facilitate all the financial institutions, government, corporate sectors and Banks along with NBFCs to access the Retail Payment System easily. This also helps one to engage in high volume of money transaction at a single go. There are 10 prominent nationalised and private banks that are said to be the promoters of NPCI. These banks are State Bank of India, Union Bank of India, HSBC, HDFC, ICICI Bank, Canara Bank, Citibank, Bank of Baroda, Punjab National Bank and Bank of India.
ICICI, HSBC, HDFC and Citibank are the private banks that are involved in promoting NCPI. The online transaction through NCPI has climbed up to 20 million per day from mere 2 million per day in last few years. The RBI has set up the organisation to encourage Retail Payment System which is growing at increasing rate in India.
NACH, NACH Credit & NACH Debit
NACH is a part of NCPI that was started in the year 2007. The National Automated Clearing House, regulated and supervised by RBI, is a web-based payment solution for bulk money transaction. Small retailers, government, corporate sectors, NBFCs, Banks and such are encouraged for core banking and interbank transaction via online and mobile banking with the help of NACH.
NACH Credit is an electronic payment service governed by the Reserve Bank of India for the bulk payment by the organisation and corporate sectors. Through NACH Credit any organisation that is authorised under RBI guidelines can make huge payments to the multiple beneficiaries directly to their personal bank accounts. Salary from the corporate, dividends, pension, interest and subsidies are provided therough NACH Credit system by using single system.
The Key features of the system are:
- The system is capable of engaging 10 million transactions in a single day.
- Safe and secure for web access, file and document uploads and downloads
- Online Dispute management system is available
- There is a provision of multiple file processing that can be done in single settlement.
- Direct Corporate Access for the corporate organisations.
- Corporate sectors now can check the status of their payment through direct access to the NACH via Direct Corporate Access.
- There are systems ACK/NACK that help the organisations to track their payments easily.
- NACH Credits are closed on Sundays and holidays that RTGS follows.
NACH debit is similar to NACH Credit. It is system in NACH through which banks and other financial institutions can accept payments in large volume without interference / barriers of the third party. Through NACH Debit bulk payments like utility charges can be collected through single settlements. The banks, NBFCs, corporate sectors and government can easily accept large amount of payment like EMI, loans, electricity bills, water, tax and other payments.
The Key Features of NACH Debit:
- Online Dispute Management System
- Unique Mandate Reference Number available that helps the customer to track multiple payments.
- Safe and secure transaction between the organisation and parties. Confidential information security.
Difference between NACH and ECS
Electronic Clearing System is the method of online payment and money transaction and NACH was initiated to solve the issues that ECS encounters regarding payment process. There are a number of differences that make the NACH better than the ECS now.
- The most common problem in ECS is it needs a lot of paperwork unlike NACH. The later has smoother workflow so no need to have bulk paperwork for it.
- Due to a lot of paperwork the process under ECS can be rejected many times. Unline ECS this happens rare in NACH.
- ECS is time consuming. ECS takes 3-4 days for the settlement whereas settlement is done within 24 hours under NACH.
- There is no Unique Mandate Registration Reference Number in ECS but it has in NACH. This number can be used for future transactions under NACH.
- NACH has online dispute management system that ECS does not have.
Objectives of NACH
The NACH system provides end-to-end processing of mass electronic payment instructions with the following objectives:
- To create a national eco-framework covering all banks throughout the country for handling and processing electronic payment requests.
- To provide a technical platform for the banks to route the credit/debit instructions through NPCI by making use of different routing codes such as IIN Code, IFSC Code and MICR Code.
- To provide Direct Corporate Access (DCA) to few chosen Corporates/Government Depts, and other significant client foundations to NPCI NACH framework.
- To provide a sound system for settlement, special cases taking care of, preparing of profits, rejects, inversions, discounts, denials, management of holidays, dispute handling and many more.
- To maintain a robust mapper of Aadhaar number to Institution Identification Number (IIN) with related governance mechanism.
- To create a strong Mandate Management System (MMS) and related governance mechanism.
The NACH system is based on Core-Banking Solution (CBS) of the participating banks for centralized posting of internal debit / credit transactions and NPCI would run the Centralized administration from Chennai or as might be chosen from time to time, with settlement in the books of Reserve Bank of India (RBI).
Does NACH apply to all ECS transactions?
NACH has taken over the ECS transactions since the first day of the month of May that is 1st May 2016. It will be applied to all the ECS transactions. Payments like interest premiums, SIP in mutual funds, Utilities, credit card bills and any other bulk payments can be easily made with NACH. People who are already using ECS will not get affected by this new NACH. However when their ECS gets expired, they are required to register under the NACH as a new user as their will not be any renewal of ECS. For the new users they will not get any ECS registration as since 1st of May the new registration for ECS has been closed.
Those who are still using ECS will not get converted to NACH automatically. Either the users can close the ECS and register freshly with NACH or they can wait until the expiry of their ECS account and then they can start with NACH.
There are two ways to register for NACH. Some of the commercial banks provide paper forms to the users to apply for it while most of the leading banks choose online process and providing e-Mandate to the customers for registration process.
Benefits of NACH in Mutual Fund Investments
The most important benefit of NACH in investing in Mutual Fund is that the time to SIP registration is much lesser than in ECS. Unlike ECS where it takes 30 days to register an investor, NACH taken only 10-15 days and completes the entire process perfectly.
IN NACH there is another advantage that can be added that from now onwards the investor does not need to pay through cheques or online transfer while investing in mutual funds at any point of time. They can easily use NACH for the lump sum payment to invest in multiple portfolios or in single portfolio. The fund-house system helps in here.
Another benefit with NACH is that the payment is made and collected in a same day. Due to this the investor can be able to track the investment and payments that he made.
How will NACH modify investing in Mutual Funds?
NACH has made investing in Mutual Funds way too easy. It is a onetime registration process, so the mandate has to register with NACH for single time and can use it for investing in Mutual Find for a long time unlike ECS. Here once the mandate is registered with NACH, it automatically linked with the bank account that the mandate is using for the Mutual Fund Folio. It will be automatically authorised and there will be a payment process takes place every month. The maximum amount must be set by the mandate.
It can be done as fixed time span (say a year or couple of years) or it can be done manual. In the manual process the debit will continue unless the mandate cancels the process. The only thing is to be noted that the Mandate can use only one folio for one mandate registration. If the user has multiple folios then there needs to be separate forms for each folio.
For Lump sum Purchase
- With NACH the lump sum purchase is easier than ECS now. The investor has to register with NACH by submitting Onetime Mandate Registration Form of NACH. This registration is to register the relevant bank details with the NACH for the payment process.
- After the registration process the mandate need to avail the additional purchase, SIP purchase and other such kinds of purchases which will be the lump sum purchase for the investors. Soon NACH will launch the SMS and phone transactions to avail such purchases through your phone.
- The payment will be done through RTGS/NEFT. There is also provision of Fax / email transactions through which the investor can go for lump sum purchase transactions. They just need to email / Fax regarding the transaction and that will be enough to proceed.
- In case of SIP registration, the time takes under NACH is 15 days unlike the existing ECS mandate registration that takes 30 long days for the SIP registration.
- If the bank of the investor is already registered with the NACH, then the investor can easily register for SIP through filling up the Onetime Mandate Registration Form of NACH. It will take 15 days to finish the process.
- If the relevant bank of the investor is not registered with NACH then the investor has to go with the ECS mandate that currently exists and it takes 30 days for the SIP registration.
- One important point to be noted here that the bank you are registering must be one of the listed banks under the NACH.
Does NACH affect existing Mutual Fund SIPs?
NACH does not affect the existing Mutual Fund SIPs. Those who are applying for new SIPs they have to register with NACH. But those who already have ECS mandate for their SIPs can continue with it till the expiry of the SIP. Once the ECS is expired the investor if he / she wish to renew the SIP then has to go with NACH registration process. Until then ECS Mandate and existing SIPs will be unaffected by the new NACH process.
Advantages of Registering Mutual Fund SIP through NACH
- There is a bunch of advantages of registering Mutual Fund SIP through NACH that one can count on. The most important point is it takes much lesser time than ECS process. It merely takes 10-15 days for the entire registration process.
- NACH has less paperwork. So there is no physical exhaustion of the papers and documents to fly from here to there. This is one of the many reasons why it takes less time to process.
- There is nothing offline in NACH. The entire process is done by online steps. Due to this the process becomes shorter and error-free.
- Under ECS there is a high possibility of rejection of documents as it requires a lot of paperwork. But in NACH this kind of errors are not found easily.
- There is no requirement of presenting cheque or any paper note every time the investor goes for purchase. The debit will be done automatically every month if the investor wishes to.
- The process of payment is easier. If the investor wants to fix it to 1 year he/she can. Also if anytime he/she wants can cancel the payment as well just through an SMS (will launch soon).
- There is Online Dispute Management System in the NACH that will make things easier, save the investor from the error and dispute and will smooth the workflow.