IntroductionThe national payments corporation of India (NPCI) implemented National Automated Clearing House (NACH) to overcome the barriers set up by Electronic Clearing Service (ECS) systems set up RBI. NACH aims to create a better option for facilitating clearing services than the ECS system. ECS is replaced by NACH from 1st May 2016. All the banks under ECS have to switch to NACH within their validity period.
It is an electronic payment service for Banks, Financial Institutions, Corporate and Government to facilitate interbank, high volume, electronic transactions which are repetitive and periodic in nature thereby removing any geographical barriers within the country while making payments.
NACH provides a single set of rules for electronic transactions which are common across all the Participants, Service Providers and Users.
NACH System can be used for:
- making bulk transactions towards distribution of payments such as subsidies, dividends, interest, salary, pension
- making bulk transactions towards collection of payments such as telephone, electricity, water, loans, investments in mutual funds, insurance premium etc.
NACH aids government through its Aadhar Payment Bridge (APB) system by enabling Government Agencies to transfer subsidies and other benefits directly to the intended beneficiary using an Aadhar numbers by liking Government departments and their sponsor banks on one side and beneficiary banks and beneficiary on the other hand.
Type of transactions:NACH is majorly used for making high volume, low value debit/credit transactions that are repetitive in nature. Like ECS, NACH supports two types of transactions.
Direct Credit involving distribution of salary, pensions, dividends, interest, etc to the relevant stakeholders at set frequency and periods and
Direct Debit involving regular fixed payments towards insurance premiums, loan repayments, recurring deposits, etc.
Benefits of using NACH:
- NACH provides simplifying the mandates, reduction of activation time thereby reducing the cost of operation.
- NACH helps avoid processing charges of paper based transactions such as cheques, which can provide significant cost savings to Banks and Financial Institutions as all credits and debits are done electronically.
- Organisations can take advantage of automatic crediting of allowance benefits or scholarships, timely dispersal of salaries, pensions etc. thereby providing better customer service.
- Customers can make payment of bills, instalments, premiums without missing the due dates by adding specified monthly dates.
- NACH avoids high interchange fees of the credit card companies by charging a nominal fee.
- Member banks can create their own solutions and products to address specific corporate and user needs for mandate management, thus ensuring greater efficiency in customer service through a superior mandate management system (MMS).
- This system eliminates the regional and geographical barriers unlike ECS and facilitates same day transactions anywhere in India.
Difference between NACH and ECS:
- The process of activation of ECS mandates had a longer turnaround time of 30 days while it is expected to be 10 days in NACH.
- NACH provides same day presentation and settlement, including returns processing while in case of ECS it is spread over 3-4 days.
- NACH has a well defined Dispute Management System (DMS); electronic platform to raise and resolve issues with a dispute reference number. In case of ECS; Dispute management is left to the prudence of the Destination Bank.
- ECS has regional and geographical barriers, while NACH doesn’t have any.
- ECS is implemented by RBI while NACH is under NPCI
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