Payments in India have evolved over the years, from cash payments to digital payments, we have made huge progress in the last few years. India has developed towards a cashless economy. The Reserve Bank of India (RBI), controls and regulates payment systems in India. The RBI has taken the necessary steps to facilitate the Net and Gross payment systems under its control. It has made various payment methods available for implementation in the country to facilitate banking and transactions throughout the country. RBI controls the entire payments and settlement system unanimously. This ensures that all payment methods in the country are governed, trusted, safe, and simple to use.
In recent years, online fund transfers have overtaken traditional methods of payment. Using an internet banking facility, large sums of money can now be transferred across countries without difficulty. With the development of online banking and payment systems, the use of plastic money like debit and credit cards have increased rapidly. People can apply for a personal loan by filling out an online application rather than visiting a physical branch, making it more accessible to the general population.
Similarly, NACH was launched to strengthen multiple ECS systems running throughout the country. NACH is the National Automated Clearing House, which was implemented by the National Payments Corporation of India (NPCI). NACH has been established to automate and manage payments across multiple banks, to manage repetitive or recurring payments like electricity bills, SIPs, insurance premiums, loans or any other recurring payment.
So, National Automated Clearing House (NACH), is a centralised structure that was introduced to consolidate multiple ECS systems across the country, provide a basis for standardisation & practices, and eliminates local barriers/inhibitors. It is a joint initiative of the Reserve Bank of India (RBI), and the Indian Banks’ Association (IBA), to build a strong payment and settlement infrastructure in India under the provisions of the Payment and Settlement Systems Act, 2007. The NACH system is designed to have a national footprint and is expected to cover all the core banking enabled bank branches across the country, regardless of their location. It is created to make payments easier and more cost-effective, NACH offers a fast and efficient clearing platform.
Advantages of NACH
NACH has been created to have a national reach, to bring together all of its partner banks and core banking branches. It adheres to a set of common standards and rules while also providing high-level security. With less paperwork and friction between institutions, the amount of manual intervention has decreased.
- Avoid credit card companies’ high interchange fees.
- Avoid bank and financial institution paper-based cheque
- Allows subsidies to be transferred directly to Aadhaar-Linked Bank Accounts.
- Allows for highly secure and quick transactions.
- Helps with recurring payments.
What is NACH Mandate?
The NACH mandate consists of two types:
The NACH Debit is used by financial institutions and banks to collect large amounts of money from a large number of people in a non-interfering manner. In case of a loan, the lender uses this service to automatically deduct monthly installments from your bank account after the customer submits the NACH mandate form.
It automates and streamlines the payment of recurring payments, such as EMIs, bills, and taxes while simplifying and tracking the collection process for companies through a single payment settlement. The NACH debit is primarily used to pay telephone bills, SIPs in mutual funds, and electricity bills.
NACH Debit Advantages
- Secure and easy collection of recurring payments from a large number of customers directly from their bank account.
- It allows agencies and organisations to collect payments for customers by implementing a secure system that generates a unique reference number for tracking.
- Safe and secure online dispute resolution system for high-value transactions.
- The service makes it easier for customers to pay their bills and taxes on time, by eliminating the need to remember the due date for EMIs, bills, or taxes.
It allows businesses authorised by the RBI to make large payments directly to the bank accounts of multiple beneficiaries. An electronic payment service that enables large companies to make bulk payments. Which facilitates large payments to be managed by one central system with multiple receivers through the NACH credit system.
It enables organisations and corporate sectors to make bulk payments that are governed by RBI regulations, safely, securely, and transparently by providing unique reference numbers assigned to each transaction.
NACH Credit organisations that are authorised by the RBI can make large volume payments to a large number of beneficiaries directly into their personal bank accounts. The NACH Credit system provides salary, dividends, pension, interest, and subsidies through a single system.
NACH Credit is used for salary distribution, dividend payments, and interest payments directly to the bank account of the beneficiaries.
NACH Credit Advantages
- The NACH system can handle 10 million transactions in a single day.
- It offers an online dispute resolution mechanism in the event of a dispute.
- NACH allows multiple files to be processed in a single settlement request and ensures security when documents are uploaded and approved via web access.
- Direct Corporate Access makes it easier for corporate organisations to monitor the status of their transactions by accessing NACH more efficiently.
What are Recurring Payments?
Automatic payments are known as recurring payments or subscriptions.
A customer authorizes the service provider to regularly deduct a fixed or variable amount from their account.
Businesses can use recurring payments in a variety of ways:
Netflix, Amazon Prime, Spotify, etc., and other streaming networks depend heavily on subscriptions that must be renewed periodically. Magazines and newsletters are funded similarly – both require recurring payments.
SaaS businesses rely heavily on charging a recurring monthly payment that can scale up with use.
Loans, investments, and insurance premiums are best paid at regular intervals.
Telephone bills, electric bills, cable bills, gym memberships, and so on are examples of utilities, which, as we all know, are recurring in nature.
How does NACH Mandate Work?
The NACH mandate form is used by the customer to grant the money-collecting agency the right to debit his account regularly for a set period. The mandate follows a standardised format created by the NPCI for all partner banks.
To facilitate the auto-debit of EMIs for personal loans, the money collection agency is required to collect the NACH mandate form from customers.
The financial institution must verify that the information provided on the NACH mandate form is accurate. After the verification process is completed, the lender can send the NACH mandate to its bank.
Following that, the lender bank shares the NACH mandate with the NPCI. After verification, the mandate is sent to the customer’s bank to have auto deduction enabled on his account for easy EMI payment. If only the customer’s bank approves the mandate, the lender is authorised to withdraw funds from the customer’s account.
NACH is being implemented to help everyone who makes large amounts of payments every month. Customers, banks, and organisations all benefited equally from the NACH system.
- An automated transfer process that makes it easier and simpler to handle payments.
- A quicker process that can be completed in a single day.
- Customers can use the auto-debit feature to avoid having to remember payment dates for EMIs, bills, taxes, and other recurring payments that must be made at regular intervals.
- The online process speeds up the process by eliminating the need for cheques and clearing.
- It takes less time to approve and send payments such as dividends, salaries, and bonuses.
- Make grant and subsidy payments easier and faster for recipients.
- Customer satisfaction is increased due to the ease with which customer bills can be paid.
- Faster payment approval boosts customer relationships and ensures corporate clients are satisfied with timely services.
- Less paperwork, such as a cheque, reduces complexity and time requirements.
- Online transactions make it simpler and easier for all parties to conduct business.
- Reduces the risk of fraud and theft.
Individuals must provide their IFSC or MICR code, Bank Account Number, and Bank Name of the bank account from which they want the money to be deducted.
The frequency of the debit can be monthly, quarterly, semi-annually, annually, or As and when it is presented. The option ‘As and when presented’ allows the institution to debit the amount on any date, even multiple times per month. This gives the user the option to request the institution to postpone the debit in case of insufficient funds in their account.
The mandate also includes a provision for specifying a Period or the mandate’s lifetime. The ‘From’ date indicates when the mandate becomes active, and the ‘To’ date indicates when it expires. The mandate also includes a provision for extending the expiry date until it is cancelled, which can be useful in the case of recurring debits such as SIPs.
The institution issuing the mandate to the individual fills the Sponsor Bank Code and the Utility Code. The Utility Code identifies the institution registered with NPCI, and the Sponsor Bank Code identifies the bank with which they are associated.
Canceling a NACH Mandate
Both the institution and the individual can cancel a NACH Mandate before it expires. In the case of the institution, a NACH mandate form is submitted with the individual’s information and the Cancel option checked.
On the other hand, individuals can cancel by contacting their bank directly, or by using the internet or mobile banking.
Active mandates on each account are typically shown within the NACH section of the Account/Service-related information.
As we can see, NACH Mandate has numerous advantages for both customers and organisations. It also makes it easier for banks to organise and monitor every transaction. NACH Mandate has become an important part of the personal loan process as it helps to pay the EMIs and other recurring payments on time without any delay.
Additionally, it makes transactions safer for parties who deal with large volumes of transactions on a daily basis. Also, its single settlement system is beneficial to every small or large business for the safe payment and collection of funds at regular intervals.
The NACH system is governed by the RBI, which makes it a centralised unit for monitoring and controlling all transactions.
1. What is the difference between NACH and ECS?
NACH is a faster process than ECS. It offers presentation, settlement, and even return processing. NACH has a highly effective Dispute Management System and it features a robust mandate management system that assigns a unique reference number to each mandate.
ECS settlements take 3-4 days, whereas NACH settlements take place within 24 hours. Unlike in ECS, NACH has a Unique Mandate Reference Number (UMRN). This number can be used for future transactions under NACH.
2. What are e-NACH and e-Mandate?
These are new payment services that enable bank account holders to automate recurring payments. The e-NACH and e-Mandate services make it easier to manage recurring payments such as bill payments, insurance premium payments, SIP payments, and school fees payments.
The e-NACH and e-Mandate are two distinct services that produce the same results. While e-NACH is governed by multiple banks, individual banks control e-Mandate.
3. Who can initiate a Mandate?
Both the creditor bank and the debtor bank can initiate a mandate creation, amendment, or cancellation.
4. Who can cancel a NACH Mandate?
Both the institution and the individual can cancel a NACH Mandate before it expires.
5. What is the full form of UMRN?
UMRN stands for Unique Mandate Reference Number.