NACH (National Automated Clearing House) – all you need to know.

Last Updated on June 14, 2021

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What is NACH?

NACH stands for National Automated Clearing House. It is a centralised payment system for financial institutions, corporates, banks and the Government. NPCI (National Payment Corporation of India) implemented this system in the year 2007. This system provides a single platform for interbank high volume repetitive transactions. This is a web-based solution to facilitate interbank and electronic transactions. NACH aims to replace Electronic Clearing Service (ECS) systems across the country.

Objective of NACH

NPCI implemented NACH system with the following objectives:

  1. To create a single and centralised platform for all banks throughout the country for handling and processing electronic transactions.
  2. Facilitate government and its agencies in the distribution of salary, pension, subsidies etc. and collection of payments like electricity bill, water bill, telephone bill and taxes etc.
  3. To provide payment solutions for bulk money transactions. Bulk payments and collections can be made through a single settlement.
  4. To make the transactions safe and secure between the organisation and the party. All confidential information is secure.
  5. To provide a technical platform for banks by making use of different codes like IFCA Code, MICR Code, IIN Code etc.

NACH Credit & Debit

  1. NACH Credit: Through the NACH mandate, a corporate can make bulk payments of salary, dividend, pension, interest and subsidies to the beneficiaries.
  2. NACH Debit: Through the NACH mandate, bulk payments like water bill, electricity bill, telephone bill, EMI, tax and others can be collected easily.

How does NACH mandate work?

Here is the step-by-step process of how NACH works:

  1. The corporate (or money-collecting agency) collects the NACH mandate form from its customers. Along with the NACH mandate form, the customer provides the corporate with the authority to debit his/her account for a certain period and at a specified frequency.
  2. The corporate/agency verifies and validates the details provided by the customer in the NACH mandate form.
  3. After verification of the requisite details, the corporate forward the NACH mandate to its bank.
  4. The corporate’s bank then shares the NACH mandate with NPCI.
  5. Once the information is validated, the NPCI forwards the mandate to the customer’s bank for approval. It is important to note that only validated transactions are forwarded to the customer’s bank for debiting.
  6. Then customer’s bank approves the transaction. After that corporate is authorised to collect funds from the customer’s account.

Aadhaar Payment Bridge

National Automated Clearing House also helps the Government & its agencies make payments of the Direct Benefits Transfer Scheme, given by the Government, through the Aadhaar Payment Bridge. Amounts of various schemes are directly transferred to the bank accounts.

Benefits of NACH for SME and StartUp

Without a doubt, the National Automated Clearing House (NACH) is a unique payment solution and is helping several startups to simplify operations and banking transactions. It helps startups greatly with interbank electronic transactions, which are repetitive. Suppose you are a company or an individual who wishes to make bulk payments or high volume transactions like salary, bill payments, loans, etc., you can easily do that through NACH.

Startups who require to collect payments from customers often and at a regular cadence can benefit from the subscription management feature of NACH. SME and Startup can automatically collect recurring payments directly from their customer’s bank accounts via NACH. Startups can use the subscription management feature to make regular payments or even collect payments. 

Benefit to customers, banks and organisations

NPCI introduced NACH to facilitate bulk and high volume transactions. From customers to banks and to organisations, everyone is benefited through this electronic payment clearing system.

  • Customer:  NACH system does not require any manual work to carry out transaction. So, it is seamless and faster. Customer need not remember the dates for payments like bill payments, credit card payment, EMI payment etc. The payments will be done on time through automatic transfer via the customer’s bank account.
  • Bank:  Banks can provide better service to the customers. Easy transactions without taking much time for processing. No manual process is involved, so less error and fast work. Collection of EMIs and loan amount becomes easy.
  • Organisation: It needs less time to process the payments like allowances, salary, pension, subsidies etc. All payments are online. It helps transfer huge payments directly to the beneficiary’s bank account. And the collections of high volumes like bill payment and taxes are collected at a single point from multiple branches.

Frequently Asked Questions (FAQs)

  1. How are disputes related to NACH resolved?

The finance industry and disputes go hand in hand. Every financial framework must incorporate a dispute resolution process. The NPCI has set up a specialized Panel for Resolution and Disputes (PRD). The main responsibility of this body is to handle interbank settlement disputes. Arbitration cases referred to the PRD are evaluated, processed, and resolved for a prescribed fee.

  1. Does NACH Credit work on all days, including weekends?  

NACH Credit does not work on all days. NACH Credit remains closed for operation on Sundays and RTGS holiday declared by the RBI from time to time.

  1. Can Corporate also participate in NACH Credit? 

Yes. DCA facilitates the access of NACH Credit to Corporates. It simplifies operations both for Corporates and their Sponsor Banks. DCA functionality comes with the sponsor bank’s control. Therefore, it allows tracking transactions, reports, and MIS by all the concerned entities.

  1. Does NPCI offer any variants of NACH Credit?

 Yes, NPCI offers two variants of NACH Credit :

  1. The first variant is available in a 156 character file format (similar to NECS file format).
  2. The second variant is available in 306 character file format.
  1. How does the settlement take place for NACH Credit transactions?

 The settlement for NACH Credit (156 character file format) occurs in the participating bank’s current account, maintained with the Deposit Accounts Department (DAD), RBI, Mumbai. The settlement for NACH Credit (306 character file format) occurs in the RTGS account of the participating banks maintained with the Deposit Accounts Department (DAD), Reserve Bank of India, Mumbai. 

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About the Author: Om Prakash