NACH: National Automated Clearing House

What is NPCI?

An umbrella organisation (work together formally to coordinate activities or pool resources) to operate the retail payments and settlements in India. It was established by the Reserve Bank of India and Indian Banks’ Association.

Its main aim is to provide infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement systems. It focuses to bring innovations in the retail payment systems through the use of technology to achieve high efficiency in operations and make the reach of payment systems all over. With each passing year, they are moving towards their vision to be the best payments network globally.

What is NACH?

• Its full form is the National Automated Clearing House.
• NPCI implemented NACH started in the year 2007 for banks, financial institutions, corporates, and government.
• Its main purpose is to facilitate the electronic transactions which are of high volume, repetitive and periodic in nature. For example: payment of salary every month

Basic Uses of NACH

• Bulk transactions towards the distribution of subsidies, dividends, interest, salary, pension etc.
• Bulk transactions towards the collection of payments pertaining to telephone, electricity, water, loans, investments in mutual funds, insurance premium etc.

What is NACH up to?

• To further strengthen multiple ECS systems running across the country
• Robust system with high volume processing capability
• Cost-effective
• Better liquidity management
• One-stop-shop for push (credit) and pull (debit) transactions
• Corporate portability
• Automated workflow (host to host connectivity)
• Response for all transactions for better reconciliation
• A large network of banks
• Provides a framework for the harmonization of standard & practices and removes local barriers/inhibitors, which makes the transactional process speedy and efficient
• To cover the entire core banking enabled bank branches spread across the geography of the country irrespective of the location of the bank branch.
• Facilitates the member banks to design their own products
• Unique Mandate Reference Number available that helps the customer to track multiple payments.
• Addresses specific needs of the banks & corporates including a refined Mandate Management System (MMS) and an online Dispute Management System (DMS) with strong information exchange and customised MIS capabilities.
• Providing a robust, secure and scalable platform to the participants with both transaction and file-based transaction processing capabilities.
• Best in class security features, cost efficiency & payment performance (STP) coupled with multi-level data validation facility accessible to all participants across the country.
• NACH’s Aadhaar Payment Bridge (APB) System, developed by NPCI has been helping the Government and Government Agencies in making the Direct Benefit Transfer scheme a success.
• Successfully channelizing the Government subsidies and benefits to the intended beneficiaries using the Aadhaar numbers. The APB System links the Government Departments and their sponsor banks on one side and beneficiary banks and beneficiary on the other hand.

What are the objectives of NACH?

• Getting all the bank branches all over India under one roof to process online payment instructions
• Provide a technology platform to banks to route the debit/credit instructions through NPCI using different routing codes like IFSC Code / MICR Code / IIN code
• Provide Direct Corporate Access (DCA) to selected Corporates or Government Departments to NPCI NACH system.
• Facilitating Organised revocations, holiday’s management, settlement, exceptions handling, processing of returns, rejects, reversals, refunds, unwinding, dispute handling etc.
• Maintaining a strong Aadhar Number to Institution Identification Number (IIN) mapper with respect to the respective governance mechanism.
• Create a Mandate Management and related governance mechanism which is related to the whole process included in NACH

Comparison of ECS and NACH

• Electronic Clearing Service (ECS) was introduced in India by Reserve Bank of India (RBI) during the 1990s to facilitate periodic payments like loan instalments, insurance premium etc. In ECS the mandate form was to be physically sent to the customers’ bank for registration. It uses 156 character format.
• National Automated Clearing House (NACH) was introduced in the year 2013 to facilitate registration of mandate on the basis of an image of the mandate transmitted through NACH to the customer’s bank. It uses 306 character format with a facility to transmit the image of the mandate.
• ECS took around 30 days for mandate activation that reduces to around 10 days with NACH
• ECS has a lot of paperwork and rejection ratio is very high, whereas the NACH offers easy online registration
• Creating a unified system for mandate among all the branches all over India with a predefined registration process
• NACH has a mostly same day presentation, settlement and returns processing, whereas ECS would take around 3–4 days
• NACH has an online Dispute Management System to address the specific needs of the banks & corporates
• NACH has the Unique Mandate Reference Number to clearly identify each mandate with reference to a customer.

NACH Products

1. NACH Debit — The banks, NBFCs, corporate sectors and government can accept a large amount of payment like EMI, loans, electricity bills, water, tax and other payments.
2. NACH Credit — The banks, NBFCs, corporate sectors and government can accept a large amount of payment like EMI, loans, electricity bills, water, tax and other payments.
3. Aadhaar Payment Bridge (APB) System — One of the unique payment systems implemented by NPCI, uses Aadhaar number as a central key for electronically channelizing the Government benefits and subsidies in the Aadhaar Enabled Bank Accounts (AEBA) of the intended beneficiaries. The implementation of APB System has also lead to electronification of a large number of retail payment transactions which were predominantly either in cash or cheque.
4. The Mandate Management System (MMS) is a service provided by NACH Debit to manage Debit mandates of Clients, It allows you to Manage, Amend and Cancellation of Payment mandates.
5. NPCI mapper is a repository of Aadhaar numbers maintained by the APB System and used for the purpose of routing the APB transactions to the destination banks. The NPCI mapper contains Aadhaar number along with IIN of the bank to which the customer has seeded his/her Aadhaar number. Banks need to upload Aadhaar number in NPCI mapper in a specified file format through NACH portal. APB System participating banks after receiving the Aadhaar number from the customer seeds the same into the bank account details of the customer maintained in the Core Banking System and subsequently uploads such Aadhaar numbers’ into the NPCI mapper on a regular basis.

Understanding NACH

Take a case of corporate manufacturing and selling ABC to thousands of distributors. Of course, the post-distribution collection of payments is tough.

There are multiple options for payment, but keeping a record is difficult and requires constant followup that further requires time and resources and money.

Making collection easier is NACH that facilitates automatic clearing through interbank volume electronic transactions that are repetitive and periodic in nature.

The company sends a mandate form to the distributors to fill. The distributor fills, it selects debit and send the form to the company which is further sent to the companies bank (Sponsor) for registration with the distributor’s bank (Destination) through NPCI.

Post authorization now the company can debit the distributors on the agreed frequency as available in mandate making a collection of payments simple and efficient

Corporate collecting NACH can get Mandate done from its customers using the mandate form. The customer authorizes the corporate to debit his account for a defined period and a defined frequency

Corporate after verifying details provided by customer forward the same to its banks (destination bank).

The corporate’s bank share the NACH Mandate with NPCI

NPCI further forwards the NACH Mandate with the customer’s bank (Sponsor) to seek its approval

Once the mandate is approved by the customer’s bank, the corporate is considered authorised to collect funds from customers account

e-Nach

e NACH required Aadhaar-based KYC.

The Supreme court recently passed a judgment to stop the use of Aadhaar-based KYC for private companies, and this caused a major upset for Fintech companies, payment banks, insurance providers, mutual funds etc.

SO it switched back to the slow and inefficient paper-based mandate.

Until, the introduction of e Mandate.

e-Mandate

The centralized mandate validation service offered by NPCI ensures that every NACH debit transaction is validated at NPCI against the mandate information and only successfully validated transactions are forwarded to the customer’s bank for debiting his account

In order to make the whole process of mandate registration online, NPCI has also introduced e-mandate, a process which will allow the bank customers to self approve his mandate by logging into net banking.

Registration of e-mandate requires 3 simple steps:

1. Customer does a buy decision provides information on the merchant website
2. Upon submission of mandate information, the customer is redirected to its bank’s net banking
3. On successful login, the customer views mandate details on the bank page and confirm the registration of e-mandate

Variants of Electronic Mandate:

Variant 1 — Data mandates through destination bank: In this case, customer can submit the physical mandate to their bank branch. The bank after verification of signature and other details provided in the mandate will upload only the data mandate through NACH system on the sponsor bank. The mandate image will be optional.

Variant 2 — E-Mandate through API: The customer after entering the details of the mandate in the web page provided by the corporate or integrator will be directed to the internet banking page of his bank to authenticate the mandate. The data is then uploaded by his bank on the sponsor bank through NACH system. This should be automated end to end.

Variant 3 — E-Mandate through E-Sign: The corporate, aggregator or bank can get a digital mandate authenticated using Aadhaar credentials verified using UIDAI data. The digital mandate will contain the e-Sign of the customer which will be passed on by the sponsor bank to the destination bank. The destination bank has to verify the e-Sign and accept or reject the mandate as per their internal operational procedures.

Benefits of NACH

NACH is poised to transform the Indian payment landscape with its varied features like:

• Nationwide reach
• Same day realization
• Multi-level Security
• Future-ready Technology
• The pan India availability of services makes collections cost-effective for the corporate and also every customer accessible irrespective of the location.

Cancelling a NACH Mandate

Cancelling a NACH Mandate before its expiry can be done both by the institution and the individual.

The institution has to submit a NACH mandate form, like the one shown with the individual’s details, with the Cancel option ticked.

For the individual, cancelling can be done by approaching the bank directly, or via the net and mobile banking. Active mandates on each account are usually displayed under the NACH section of the Account/ Service-related information.

NACH is equipping the country for tomorrow’s payment challenges.

Read more on NACH Certification Process