National Automated Clearing House (NACH)
ABOUT:- The Reserve Bank of India offers the Electronic Clearing System (ECS) for faster payments and collections. ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. By repetitive and periodic, it is meant that the transactions occur repetitively and after a fixed time interval, But ECS lacks certain things like it takes around 30 days for its activation after submitting the required documents, it is regional based, etc.
To overcome the problems faced by ECS, National Payments Corporation of India (NPCI) came with another system called National Automated Clearing House (NACH). NACH is a centralised system, launched with an aim to consolidate multiple ECS systems running across the country and provides a framework for the harmonization of standard & practices and removes local barriers/inhibitors. It intends to provide a single set of rules (operating and business), open standards and best industry practices for electronic transactions which are common across all the Participants, Service Providers and Users etc.
Like ECS, NACH also is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. NACH system is used by institutions for making bulk payment of amounts or for bulk collection of amounts.
- Examples for bulk payment of amounts include automatic paying of interest, salary, pension, etc. by the organizations.
- Examples for bulk collection of amounts includes automatic paying of telephone / electricity / water bills, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium, etc. by the citizens of the country.
Like ECS, NACH has both Debit and Credit variants:-
- Direct Credit, which involves distribution of salary, pensions, dividends, interest, etc to the relevant stakeholders at set frequency and periods and
- Direct Debit, which making regular fixed payments towards insurance premiums, loan repayments, recurring deposits, etc.
Some facts about NACH:
- From 1st May, 2016 NACH replaced ECS.
- Those who are using ECS already can use ECS till their validity expires. After this, one will have to fill NACH forms instead of ECS forms.
- NACH forms can be availed from AMC (Asset Management Company) offices or their websites.
- The structure of NACH allows member banks to design their own products to ensure the needs of their retain customers, corporate clients and Government.
Some of the benefits of NACH scheme:
- NACH Credit and Debit schemes can be initiated by institutions/individuals who apply for it.
- There is no need to go to bank branches/ collection centres after all formalities are completed while applying.
- Freedom from paper handling such as cheques as all credits and debits are done electronically.
- So it avoids the loss and fraudulent of papers in transit.
- NACH is very cost effective.
- This system eliminates the local barriers and facilitates same day transactions anywhere in India.
- Customers need not keep track of due date for payments.
Membership:-
NPCI has categorised members of NACH system in three entities:
- Sponsor Banks are allowed to originate transactions the system required, they have a mutual agreement with NPCI and also are members of any payment system approved by the Reserve Bank of India.
- Destination Banks are allowed to do transaction, process mandates and update the Aadhar mapper through the use of the system. On necessary agreement, all the banks that are members of any payment system participate on NACH system as Destination Banks.
The corporate/government departments, on submission of necessary agreement with their Sponsor Banks, participate on NACH system as Users. For this, to facilitate settlement on their behalf, the departments indicate the names of the Sponsor Banks with whom accounts are maintained.
NPCI notifies all of the members if a new member is added to the NACH network or if suspension or termination of a NACH member occurs.
How NACH is different from its predecessor ECS ?
- NACH consolidates all regional ECS systems into one national payment system.
- A reduction in turnaround time to 10 days is expected via NACH white it was around 30 days in ECS system.
- ECS is controlled by the Reserve Bank of India or by the designated commercial banks, while NACH will be managed by NPCI.
- IN ECS, during any discretion the management of dispute is left to the Destination Bank and Sponsor Bank while in case of NACH, there is a well-defined Dispute Management System; electronic platform to raise and resolve issues.
- ECS had local barriers, while NACH will not have any.