All you need to know about National Automated Clearing House (NACH)

The National Automated Clearing House or NACH is a centralised electronic payment service for banks, corporates, financial institutions and the Government. It was set up by the National Payment Corporation of India (NPCI) to introduce best practices in electronic transactions. The NACH was an improvement over the Electronic Clearing System ECS that it replaced from May 2016.

NACH is capable of facilitating high volume electronic transactions (that may be periodic or repetitive) without any geographical barriers within the country. A single set of rules is applicable to all users, services providers and participants of NACH. Here is all you need to know about NACH.

Objectives of NACH:

  • Devising a system of having pan India coverage to process all electronic payments
  • Efficiency in handling debits, credits, reversals, rejections and refunds
  • Direct Corporate Access for preferred users
  • Improving governance by linking AADHAR to Institution Identification Number (IIN) and introduction of mandate management system.

The Mandate Management System

The Mandate Management System or MMS is an integral part of NACH. It has the following features:

  • Automatic processing of mandate information electronically
  • Facilitation of standard mandate forms
  • Easily trackable mandates through unique number
  • Improved synchronisation between banks and service providers
  • Facilitation of better governance and defined time limits

Types of transaction carried out on NACH

  • Direct Credit:

    Distribution of salary, pension, interest or dividends to relevant stakeholders at a set frequency
  • Direct Debit:

    Payments towards loans, insurance payments, recurring deposits or any other fixed payments.

Benefits of using NACH

  • Simplification of mandates that leads to reduction of activation time and thus reduction of cost of operation
  • Avoids processing charges associated with paper based transactions that leads to significant cost savings for banks and financial institutions
  • Timely dispersal of or regular and periodic payments such as salaries, pensions, etc. that leads to better customer service
  • Avoid missing due dates of important payments such as repayment of loans, insurance premium payments, etc.
  • Nominal interchange fees of credit card companies
  • Facilitating provision of member banks to create their own product and solutions to address user needs through superior MMS
  • Elimination of regional or geographical barriers (unlike ECS) by facilitating same day transaction anywhere within the country

Benefits of NACH in Mutual Fund investments

The most important benefit of NACH has been to mutual fund investors. Registration on the NACH is a one-time process. It automatically links the bank account to the mandate using the mutual fund folio. SIP registration through NACH is also much easier. Unlike ECS that used to take 30 days to register an investor, NACH completes the process in less than half the time. If your bank is registered on the NACH, the one-time registration process takes place smoothly with much less paperwork.

Dispute resolution

NACH participants have to adhere to procedural guidelines under NPCI. An audit report has to be prepared and submitted to the NPCI, which is also shared with the Reserve Bank of India. The NPCI has also set up a Panel for Resolution and Disputes (PRD). The function of the PRD is to handle interbank settlement disputes. Arbitration cases referred to the PRD are processed and resolved for a prescribed fee.

The NACH has thus revamped the electronic processing of transaction and has facilitated efficient and speedy transactions for both users and service providers.