What is NACH? Everything You Need To Know About It

On 1st May 2016, the bulk distributors, corporates, and financial institutions took a sigh of relief! Why? You may ask. Because of the introduction of paperless NACH mandates i.e. National Automated Clearing House. It is a funds-clearing platform set up by NPCI (National Payments Corporation of India). It makes money collection easier. Although it is quite similar to its predecessor ECS (Electronic Clearing Service). But unlike ECS, NACH is more convenient because it is an automated and web-based process. Sounds complicated? Don’t worry. You will get a thorough explanation of what is NACH and everything you need to know about it.

What is NACH?

The acronym NACH stands for National Automated Clearing House. NPCI (National Payments Corporation of India) developed this centralized payment system to enable Electronic Fund Transfer (EFT) between bank accounts in India. It facilitates the automatic clearing through inter-bank high volume, low-value electronic transactions that are repetitive and periodic in nature. 

You can use NACH for a variety of transactions such as salary payments, pension payments, insurance premium payments, loan repayments, dividend payments, and other regular payments. You know it eliminates the need for physical cheques or cash transactions! Thus, it makes the payment process more efficient and secure.

How does NACH work?

NACH operates on a batch processing system, where transactions are grouped and processed in batches at specific times throughout the day. The system is designed to ensure that transactions are processed quickly and securely, with funds being credited to the beneficiary’s account on the same day. 

Image: NACH mandate form

Process of availing NACH

First of all, you need to visit the bank’s website and fill out the NACH mandate form. After filling in the details, you would be redirected to the website of the destination bank. Then you have to authenticate your request. For this you can use your net banking credentials. Thereafter, the bank will verify your account number based on which your application will be accepted or rejected. If it accepts your application, your mandate will be confirmed. Soon you would receive UMRN after which, you can schedule your future transaction. 

Steps-

Take a look into the following steps to grasp a clear idea of the working of NACH-

• Step 1: The corporate entity that wants to collect money from its customers distributes the NACH mandate form containing UMRN among the customers. 
• Step 2: The customers fill up the form thereby giving authority to the money-collecting agency to debit a specific amount of money from their bank accounts periodically.
• Step 3: The corporate entity collects the NACH mandate forms from the customers and submits them to the money-collecting agency
• Step 4: The money collecting agency verifies all the details and forwards NACH mandate forms to NPCI.
• Step 5: NPCI validates it and forwards it to the respective banks of the customers for approval.
• Step 6: The customer’s bank approves the periodic debiting of money.
• Step 7: Now the corporation gets the authorization to collect the funds from the bank account of the customers.

Variants of NACH

It has two prime variants namely- NACH Debit and NACH Credit.

NACH Debit

It facilitates corporate entities to collect payments, taxes, bills (telephone bills, electricity bills, water bills), loan installment repayments, insurance, periodic investments, etc. that are repetitive in nature.  However, it must be ensured that the entity is registered for NACH services and the payments should be periodic and payable by a large number of customers.

It helps you to automatically deduct funds safely from a vast pool of customers. Also, you can track the debit transactions through the online channels.

UMRN (Unique Mandate Reference Number)

Whenever a new mandate  is created in NACH debit, a unique number is assigned. This unique number is nothing but UMRN. It simplifies the tracking of mandate details of multiple customers. UMRN is automatically generated by the the system during the creation of a mandate. It is compulsory to execute every transaction, amendment, and cancellation. It consists of a maximum of 20 alpha-numeric characters.

Key features of NACH Debit

• Automated processing and electronic processing.
• Well-defined timelines for acknowledgment and confirmation.
• The debtor bank needs to authorize the mandate before initiating a transaction.
• Each mandate is identified by its UMRN.

NACH Credit

It is an electronic payment service that institutions use to credit money to their payees (beneficiaries). With NACH Credit, the authorized business entities make sizable payments directly in the bank accounts of the beneficiaries. Large organizations use this facility to distribute dividends, interest, salary, pension, etc. through a single system. 

Here, mandates are not required. Soon after getting the utility code from NPCI, the corporations may submit the NACH transaction file to the branch for further processing.

Objectives of NACH

It is an advanced version of ECS. NPCI created it to fulfill the following objectives-

• A centralized system for multiple electronic fund transfers.
• Usage of advanced technology to handle huge volumes of periodic payments with minimal manual process and less paperwork.
• An effective system with a high-volume payment processing capacity
• Cost-effective 
• Better liquidity management.
• One-stop shop for push (credit) and pull (debit) transactions.
• Corporate portability.
• Automated workflow with host-to-host connectivity.
• Response for all transactions for better reconciliation.
• Large network of banks.

Difference between NACH and ECS

Membership

The members of NACH systems are categorized into three entities by NPCI-

• Sponsor Banks– They initiate NACH transaction files for the collection or distribution of funds on the behalf of their Business entities registered for the services.
• Destination Banks– They are responsible for the processing of inward NACH files.

Benefits 

NACH is beneficial for banks, customers, as well as for the organization. Some of the key benefits are-

Banks

• Banks can process SWIFT transactions in real-time.
• Enhance customer service and better customer relations.
• Smooth processing and faster approval of payments.
• Building strong relationships with affiliated organizations.
• Time-saving process because there is no requirement for cheque clearing.
• Makes the service more manageable.
• Low probability of fraud and theft.
• No chance of late payments.

Consumers

• Convenient for consumers because of no manual work.
• User-friendly and fast process.
• The funds are auto-debited, therefore, no need to remember the due date of clearing payments for bills, taxes, and repayments.
• Easy to handle recurring payments due to automated processes.
• Time-saving because all transactions can be settled in a single day.
• Safe and secure process.

Organizations

• With the NACH mandate, organizations can easily clear the high volume of payments to a large pool of beneficiaries within a short span.
• Saves a significant amount of time because of the minimum approval time.
• Easy bill payment conferring higher customer satisfaction.
• Timely disbursal of salaries, dividends, and collection of EMIs.
• Less dependence on cheques and paper-based transactions.
• Facilitates automatic credit of allowances, scholarships, insurance, etc.

Conclusion

NPCI created NACH to simplify periodic payments. Multiple entities can avail of the benefits of it to handle bulk and periodic payments effectively. It hardly requires any manual intervention. You can settle all the payments within 24 hours. All thanks to NACH as you can auto-collect the payments every month without hampering the investments.