NACH

What is NACH?

NACH, or the National Automated Clearing House, was a system introduced by the National Payments Corporation of India, for interbank, high volume, electronic transfers, which were periodic in nature. The NPCI introduced NACH as an improvement over the existing Electronic Clearing System (ECS), and consolidate multiple ECS systems running all over the country. The NACH system is used for bulk towards the distribution of subsidies, dividends, interest, salary, pension, etc. and also for bulk transactions towards the collection of payments for telephone, electricity, water, loans, investments in mutual funds, insurance premium, etc.

What are the advantages of NACH?

NACH hopes to have a national reach, and bring together all core banking branches of its partner branches. It follows a common set of standards and rules and even includes support for Aadhaar based transactions. NACH also provides a high level of security and enables the partners to scale in a cost-effective manner. The amount of manual intervention has been reduced, with less paperwork and friction between institutions.

NACH also reduces the turn-around time for mandate activation from 30 days, in case of ECS, to around 10 days. The new Mandate Management System, creates a unified format for mandate across all its partner banks, maintaining the legacy registration process.

Comparing NACH to ECS

A few key points while comparing NACH to ECS:

  • NACH is much faster with same day presentation, settlement and returns processing, compared to the ECS system, where the entire process spreads over 3 -4 days.
  • NACH has a well defined Dispute Management System, to raise and solves issues, which was absent in the case of ECS.
  • NACH also has a robust Mandate Management System, with standardised mandate format and verification workflow.
  • NACH introduced the Unique Mandate Reference Number to clearly identify each mandate with reference to a customer.

How is NACH utilized by other institutions?

Suppose an individual borrows money from a lending institution and agrees to pay it off in equal monthly installments. The institution offers the individual two modes of repayment. Either by transferring the EMI amount directly to the account of the institution ( via bank account transfer, UPI, online wallets, etc.), or auto debiting from the individuals account on a fixed day of every month. To avail the option of auto-debit, the individual is asked to fill out a NACH Mandate form, authorizing the institution to debit the amount from their account. The institution then sends the mandate form to their bank (Sponsor Bank), which in turn sends it to the individual’s bank, via NPCI’s Mandate Management System.

The mandate is then verified at the individual’s bank, for matching account details and signature. Once it is approved, the individual is notified that the mandate has been activated, over the Phone, SMS or email. The Sponsor Bank is then provided with an approved mandate detail, which includes the UMRN.

The UMRN or the Unique Mandate Reference Number helps the sponsor bank, identify the individual and their bank. The sponsor bank then returns the mandate details with the UMRN to the institution, which is used by them during the auto-debit process.

Nach Mandate Form

A NACH Mandate is an authorization that an individual provides to an institution to credit or debit funds from their account. The mandate has a standardized format, as designed by the NPCI across all partner banks. A sample of the form is shown below:

NACH Mandate Form Sample

There are two types of NACH mandates, Credit and Debit Type. The one shown in the image above is of Debit Type, ie. to debit funds from an individual’s account, which is the most common use case.

The Individual is required to provide the Bank Account Number, Bank Name and the IFSC or the MICR code, of the bank account, they wish the money to be deducted from.

The Frequency of the debit maybe Monthly, Quarterly, Half Yearly, Yearly or As and when presented. The ‘As and when presented’ option enables the institution to debit the amount on any date, and even multiple times a month. This gives the user the flexibility of the user to request the institution to postpone the debit in case of unavailability of funds in their account.

The mandate also provides a provision for specifying a Period, or the lifetime of the mandate. The From date specifies when the mandate is active from, and the To date specifies when it expires. The mandate also has a provision of extending the expiry until cancelled, which can be useful in case of recurring debits, like SIPs.

The Sponsor Bank Code and the Utility Code are filled by the institution issuing the mandate to the individual. These Utility Code helps uniquely identify the institution registered with NPCI and the Sponsor Bank Code identifies the Bank they are associated with.

Cancelling a NACH Mandate

Cancelling a NACH Mandate before its expiry can be done both by the institution and the individual. In case of the institution, a NACH mandate form, as the one shown above is submitted with the individual's details, with the Cancel option ticked.

For the individual, cancelling can be done by approaching the bank directly, or via the net and mobile banking. Active mandates on each account are usually displayed under the NACH section of the Account/ Service related information.