NACH : Full Form, Features, Objectives and Benefits

What is NACH?

NACH is defined as a centralised system that enables the automated clearing of high-volume electronic transactions, like pensions, subsidies, or any other kind of reimbursement coming from the side of the government. NACH system was developed to standardise and synergise the interface of all electronic transactions with the compliances and regulations across all banking and transaction-related services. NACH was implemented for Banks, Financial Institutions, Corporates, and Governments as a web-based solution to facilitate interbank, high-volume electronic transactions that occur repeatedly and periodically.

Key takeaways from NACH:

• The NACH was launched to establish a centralised system, to consolidate and harmonise all the ECS systems running across the country. It is a web-based banking solution to support the fast and secure mobilisation of funds.
• NACH system is used to make high-volume web-based systems by the government on a repeatedly or periodic basis. For example, Payment of subsidies, salary, pension, etc.
• NACH has been used to replace the old Electronic Clearing System (ECS), where the user will have to give an automated debit instruction from their bank account.

Full Form of NACH

NACH stands for National Automated Clearing House. NACH System can be used for making bulk transactions, which are made to disburse the funds towards subsidies, dividends, interest, salary, pension, etc., and NACH is also used for bulk transactions towards the collection of payments or charges which occur periodically on telephone, electricity, water, loans, premium, etc.

Features of NACH

1. Make Bulk Transactions: The NACH System is extremely useful in making bulk transactions for the distribution of salaries, subsidies, pensions, and other transactions. It can also be used for payment transactions such as utility bills, phone bills, water bills, and electricity bills, premium payments, mutual fund payments, etc.

2. Reduced Operational Time: NACH system has been implemented to replace the old ECS system which was in use by banking sector, but ECS had its own demerits and cons, and one of the leading issue was it was not as fast as it should be. NACH, a web-based solution has overcome this major concern of ECS as reduces operational effort. NACH system even allows partial file processing.

3. Cost-Effective Structure: NACH system avoids processing charges associated with paper based transactions which leads to a significant decline in cost for banks and financial institutions. Moreover NACH system has nominal charges which makes it preferred by stakeholders nationwide.

4. Easy and Direct Connectivity: The NPCI has developed NACH Aadhaar Payment Bridge (APB) System that helps to assist the government and its agencies in the success of the Direct Benefit Transfer program, which has solved the middleman problems which were encountered by the government organisations. Using Aadhaar numbers, the APB System has been able to successfully transfer the direct government benefits and subsidies only to the actual receiver. The APB System has provided as a useful link between the government and the beneficiary.

5. Provides a Centralised System: The National Automated Clearing House (NACH) is a centralised system and it helps to overcome the regional obstacles by establishing a properly structured framework. The main goal of establishing NACH is to consolidate all the ECS systems that were active throughout the nation. Location adversity are eliminated using NACH, irrespective of the location, transfer will be done in due time and it covers all core banking-enabled bank branches nationwide.

6. Easily Customisable: NPCI has structured the NACH system in a way that it enables the member banks to develop their own products based on their own specific requirements of the banks and corporates, including a sophisticated Mandate Management System (MMS) and an online Dispute Management System (DMS), it also provides a robust information exchange and customized MIS capabilities which are useful for stakeholders.

Objectives of NACH

1. Eliminate Obstacles of ECS: The main aim of introduction of NACH is to provide all banks and institutions with a better substitute of ECS, with which stakeholders were facing lots of issues. NACH system unified the country’s several ECS (Electronic Clearing Service) systems.

2. DBT Programme: NACH is established to remove the hardships government use to face while transferring the benefits to the actual recipient, Direct Benefit Transfers under various schemes are possible due to NACH’s Aadhaar Payment Bridge (APB) mechanism.

3. Automation: It was the need of the hour, to bring cutting edge technology which can be helpful for stakeholders to deal with huge volumes of transaction. A robust, secure and scalable web based system was needed for providing faster and safer transaction platform to participants.

4. Provide Single Set of Rules: With the implementation of NACH system, NPCI intends to provide a single set of rules (operating and business), open standards and best industry practices for E-transactions which are common across all the participants, service providers and other stakeholders, etc. NACH monitors that all regulatory and statutory guidelines are followed as issued by the government.

How Does NACH Work?

Banks/ institutions provide a NACH mandate form to consumers, so that they can get their approval for debiting/crediting their account at a certain frequency for a certain period of time. The Company will verify all details as provided by the consumers in their NACH mandate form.vUpon successful verification of the mandate form, the company will forward the form to its respective bank (Sponsor bank). The bank will send the mandate form to NPCI via Mandate Management System.

Once the details are fully validated, NPCI will forward the mandate form to the customer’s bank for verification of account number and signature. Upon approval of the customer’s bank, the customer will get the intimation message that the mandate has been activated. The Sponsor Bank is then provided with an approved mandate detail, which includes the UMRN (Unique Mandate Reference Number), which helps them to identify the customer and its unique details. After that the company is permitted to debit/credit funds from the customer’s account.

Benefits of NACH

NACH has been introduced to serve all the stakeholders, and it is proving to be very useful. Benefits to stakeholder can be studied under three heads:

I. Benefits to Banks

1. Single Set of Rules: NACH has enabled operating and business compliance with different routing codes such as IFSC/MICR/INN codes for all banks in India, enables smooth interoperability.

2. Security Features: NACH provides best in class security features, cost efficiency and payment performance (STP) along with multi-level data validation facility accessible to all participants across the nation.

3. Economical: NACH framework is cost effective as it provides point-to-point infrastructure as the unified NPCI platform uses the network’s core banking infrastructure across India and provides faster and efficient way of exchange.

4. AADHAR Enabled: NACH Maintains a robust Aadhaar number mapping with Institution Identification Number (IIN) mapper with related governance mechanism and regulatory requirements.

5. Customisation: NACH Enables banks to design their own products as per there requirements through the service of NPCI.

6. Electronic Means: NACH facilitates paperless transactions and fast workflow, which eliminates manual intervention and all sorts of middleman ultimately helps to reduce the transaction time and design sustainable business processes.

II. Benefits to Customers

1. Eliminates Efforts: Less paperwork and an easy way to manage all the repetitive transactions such as Mutual Fund SIPs or insurance premium payments.

2. Safe: The procedure is secure and safe. It is a user-friendly facility with the feature of cancellation and easy access.

3. Dispute Redressal: NACH provides real time web based dispute redressal mechanism, which handles all the problems of customers related to the system and complaint disposal are done on real time basis, and customers can track there concerns.

4. Saves Time: Time saving and hassle-free as settlements takes one day.

5. Tracking of Payments: Customers can easily track there payments online, through the banking partner’s portal, they can use there credentials to login to the system and they can easily track the transactions and monitor the flow of the transaction.

III. Benefits to Organisation

1. Handles Huge Volume Transactions: Large repetitive transactions can be processed instantly and without the need for paper transmission across geographical distances.

2. Cost Effective: Low cost and low risk due to clear rules, compliance and process.

3. Fast Transaction Cycle: Improved transaction cycles for better goodwill and relationship management which enables fast and timely servicing of all financial commitments like Salaries, Bills payments, etc.

4. Eliminates Geographical Adversities: Using NACH there will be no delay due to geographies, as NACH is a centralised version of ECS, so there is no delay or halt due to different location or different geographies.

5. No Manual Interventions: Reduced the burden of processing manual debit requests.

Difference between NACH and ECS

Basis	NACH (National Automated Clearing House)	ECS (Electronic Clearing System)
Scope	A centralised system that enables bulk transactions for various types of payments. It is managed by the NPCI and applies to all banks and financial institutions across the country.	A regional clearing system used for bulk transactions, but within a specific jurisdiction or circle. It is managed by the Reserve Bank of India (RBI) and is applicable only within the respective circle where it is implemented.
Operating Model	Web-based and computer-assisted systems and transaction takes less time as compared to ECS.	ECS uses manual process and takes time for a settlement of transaction.
Dispute Redressal	NACH has a framework in place to deal with disputes.	No dedicated dispute resolution services are available to ECS.
Registration Timeline	By the end of the day, NACH registration is finalized.	It can take 25 to 30 days to complete the ECS registration process.
Time for Settlements	Day-to-day settlement of NACH payments.	It can take up to four days for ECS payments to be processed.
Red Tapism	The application process for NACH requires only a small amount of paperwork.	Many ECS applications are turned down because of excessive red tape and there is high probability of rejection.