NACH: What is NACH?

NACH OTM, How NACH will replace ECS

From 1st May, 2016 NACH will replace ECS. You have to use NACH facility to
give auto instruction of debit from your bank account. ECS (electronic clearing
service) mandates used for doing Systematic Investment Plan (SIP) in Mutual
Funds is being replaced by National Automated Clearing House (NACH) a new
system of clearing. National Payments Corporation of India (NPCI) has implemented NACH.
All new mutual fund SIPs will have to be registered using NACH. This article explains the
Payment Systems in India, How Payment Systems have evolved, About NACH, One Time
Mandate Form for NACH.

What is Payment System?

Payment System is Financial system supporting transfer of funds from payers to
payee, usually through exchange of debits and credits among financial institutions. It
consists of a paper-based mechanism for handling checks and drafts, and a paperless
mechanism (such as electronics funds transfer) for handling electronic commerce
transactions.

What are examples of Payment Systems in India.

has multiple payments and settlement systems. Reserve Bank of India(RBI) continues to
evolve new payment methods and slowly revamping the payments and settlement
capability in India.

Payment Systems in India: Cheques, ECS, NEFT, RTGS

Use of paper-based instruments (like cheques, drafts, and the like) accounts for nearly 60%
of the volume of total non-cash transactions in the country. Electronic mode of Payment is
gaining popularity due to the concerted efforts of Reserve Bank of India to popularize the
electronic payment products in preference to cash and cheques.

Paper Mode: Reserve Bank had introduced Magnetic Ink Character Recognition (MICR)
technology for speeding up and bringing in efficiency in processing of cheques. Recent
developments in paper-based instruments include launch of Speed Clearing (for local
clearance of outstation cheques drawn on core-banking enabled branches of banks),
introduction of cheque truncation system (to restrict physical movement of cheques and
enable use of images for payment processing), framing CTS-2010 Standards (for
enhancing the security features on cheque forms) and the like.
Electronic Clearing Service (ECS) Credit: ECS (Credit) scheme was introduced during
 the 1990s to handle bulk and repetitive payment requirements (like salary, interest,
dividend payments) of corporates and other institutions. ECS (Credit) facilitates customer
accounts to be credited on the specified value date and is presently available at all major
cities in the country.
The ECS (Debit) Scheme was introduced by RBI to provide a faster method of effecting
periodic and repetitive collections of utility companies. ECS (Debit) facilitates
consumers / subscribers of utility companies to make routine and repetitive payments by
mandating bank branches to debit their accounts and pass on the money to the
companies. This tremendously minimizes use of paper instruments apart from improving
process efficiency and customer satisfaction. There is no limit as to the minimum or
maximum amount of payment. This is also available across major cities in the country.
National Electronic Funds Transfer (NEFT) System: Introduced in November 2005
for facilitating one-to-one funds transfer requirements of individuals / corporates. NEFT
system provides for batch settlements at hourly intervals.
Real Time Gross Settlement (RTGS) System RTGS is a funds transfer systems where
transfer of money takes place from one bank to another on a real time and on gross
basis. Gross settlement means the transaction is settled on one to one basis without
bunching or netting with any other transaction. Once processed, payments are final and
irrevocable. This was introduced in in 2004 and settles all inter-bank payments and
customer transactions above Rs 2 lakh.
Clearing Corporation of India Limited (CCIL): CCIL was set up in April 2001 by
banks, financial institutions and primary dealers, to function as an industry service
organization for clearing and settlement of trades in money market, government
securities and foreign exchange markets.
Other Payment Systems Are Pre-Paid Payment Systems, ATMs / Point of Sale (POS)
Terminals / Online Transactions, Mobile Banking.
Aadhaar Enabled Payment System(AEPS), connects the banks with the unbanked
and the under banked. The AEPS system leverages Aadhaar online authentication and
enables Aadhaar Enabled Bank Accounts (AEBA) to be operated in anytime-anywhere
banking mode through Micro ATMs. This system is controlled by the National Payments
Corporation of India (NPCI). The 5 Aadhaar enabled basic types of banking transactions
are: Cash Withdrawal, Cash Deposit, Aadhaar to Aadhaar Funds Transfer, Gateway
Authentication Service.

How have Payment Systems evolved over time?

Evolution of Payment Systems over time from Barter

Who regulates the Payment and Settlement Systems in India?

 In India, the payment and settlement systems are regulated by the Payment and Settlement
Systems Act, 2007 (PSS Act) which was legislated in December 2007. The PSS Act as well as
the Payment and Settlement System Regulations, 2008 framed thereunder came into effect
from August 12, 2008. In terms of Section 4 of the PSS Act, no person other than the
Reserve Bank of India (RBI) can commence or operate a payment system in India unless
authorized by RBI. Reserve Bank has since authorized payment system operators of pre-paid
payment instruments, card schemes, cross-border in-bound money transfers, Automated
Teller Machine (ATM) networks and centralized clearing arrangements
What is National Payments Corporation of India?
The Reserve Bank encouraged the setting up of National Payments Corporation of India
(NPCI) to act as an umbrella organization for operating various Retail Payment Systems
(RPS) in India. NPCI became functional in early 2009

What is NACH?
The National Payments Corporation of India (NPCI) has implemented an electronic payment
service termed as National Automated Clearing House (NACH) for banks, financial
institutions, Corporates and Government Departments. NACH, National Automated Clearing
House, is a funds clearing platform set up by NPCI similar to the existing ECS of RBI
NACH has both Debit and Credit variants and it aims at facilitating interbank, high volume,
debit/credit transactions, which are bulk and repetitive in nature. T
he primary motive of NACH is to handle low value, high-volume transactions based on
electronic files.
Ideally implementing this mandate will allow transactions to be cleared in real-time mode
rather than batch mode.
The NACH platform will have national footprint which will cover 82000+ bank branches.
The new centralized ACH solution or NACH is expected to consolidate the current multiple
ECS systems and provide a framework for removal of local barriers /inhibitors and
harmonization of standards and practices.

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What is NACH, NACH Credit and NACH Debit?
NACH Credit is an electronic payment service used by an institution for affording credits to a
large number of beneficiaries in their bank accounts for the payment of dividend, interest,
salary, pension etc. by raising a single debit to the bank account of the user institution.

What is difference between NACH and ECS?

The prevalent Electronic Clearing Service (ECS) in India is available at around 89 centers in
the country. While it is operated by the RBI at 15 centers, it is operated by commercial banks
at the remaining centers. The ECS model lacks a standardized operating model, uses
manual processes and has other inherent challenges such as inconsistent timelines around
post transactional query management and servicing.

NACH ECS

A robust Mandate Management System, that Mandate verification is done based on

will include a standardized mandate format physicals, resulting in verification issues
and a defined workflow for mandate and delayed timelines.
verification.

Unique mandate registration reference no will No such concept of a unique mandate

be available, which will allow for better registration reference number.
tracking.

Provision to capture destination banks unique Higher number of rejects observed on

mandate registration in the transaction file account of mandate related issues.
resulting in lesser rejects.

Same day presentation and settlement, Presentation and settlement is spread over
including returns processing. 3-4 day period.

Well defined Dispute Management System; Is Dispute management is left to the

electronic platform to raise and resolve discretion of the Destination Bank
issues. Oversight by the NPCI.

NACH applies to all ECS transactions.

From 1st May, 2016 will be applicable to all your ECS transactions. This applies to Utility
Bills, Insurance Premiums, Credit Card Bills, SIP of Mutual Funds, or any payment,
which is recurring in nature. Note your current ECS will not be affected. They will
be honored. But fresh registration of ECS will be stopped.
Conversion of the existing ECS to NACH will NOT be done default. If you want to register
fresh ECS or when your ECS tenure expires you would have to move to NACH.
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Most of the Organizations will provide Enrollment for NACH by filling up the physical form.
But Banks will be allowing NACH enrollment electronically through E-Mandate as well.

NACH Mandate Form

What is the benefit of NACH in investing in Mutual Fund?

NACH cuts the registration time for a SIP from the current 30 days to 10-15 days.
Once NACH One Time mandate is registered an investor can invest offline without having to
write a cheque or transferring money online via a payment gateway. Investors can make use
of this payment mode for their Lump-sum Mutual Fund investments apart from SIPs in the
same folio with the fundhouse. Realization of funds from the investors account happens on
the day which helps investors track their payments on time.

How will NACH modify investing in mutual funds?

NACH is a one-time registration process which allows an investor to do lump sum or SIP
investments in mutual funds. By registering this mandate, you will authorize the relevant
bank (which is registered in your Folio) to debit a certain maximum amount per day, towards
 investment in a mutual fund scheme of the fund house. This mandate can either be given for
a fixed period (say one year) or perpetual till you cancel it. One mandate works for one
folio in the fund house.
If you have SIPs in different fund houses, you have to fill separate NACH forms.
NACH will cover all core banking platform enabled bank branches and will not be restricted
to only ECS locations as per current ECS model.

For Lump Sum Purchase:

Investor needs to submit the One Time Mandate NACH form through the AMCs aggregator
as a standalone form for registration of Bank details.
Post successful registration, an investor can avail for additional purchase, SIP transactions
and other modes of purchase transactions which will be introduced shortly viz SMS and
transactions through phone etc.
One Time Mandate NACH form can also be registered to avail of email/fax transactions that
we have enabled for our investors. Presently investors need to transfer the funds through
NEFT/RTGS mode before sending email/fax transaction. By registering One Time Mandate
NACH form which is a one-time process, investor can then just submit an email/fax
transaction conveniently and avoid the fund transfer that needs to be effected for each and
every transaction.

SIP Registration:
In case you wish to register for SIP, you need to submit the SIP registration form along with
the One Time Mandate NACH form to ensure you avail the advantages of NACH in case your
bank is activated for NACH.
In case your bank is not activated for NACH, you will have to fill in the ECS mandate form
which through which the SIP will be processed; based on the existing procedure.
Note: In case your registered bank, lists amongst the NACH activated list of banks, then the
registration of SIP will be done within 15 working days, else it will be done in 30 working
days as per existing process.
Does NACH affect existing Mutual Fund SIPs?

No. Existing Investors need not worry about ongoing SIPs. The existing mandates will
continue to be valid the present SIP cycle. No changes will be made to your ongoing SIPs.
Once the tenure or current ECS mandate ends, if you wish to renew the SIP, you will have to
fill in a NACH form, for the same.

What is NACH OTM (NACH One Time Mandate) Form?

Following image shows the NACH OTM for DSP Blackrock. You need to register it once with
following details. Attach a cancelled cheque/copy for validation. Note: We are just using DSP
Blackrock as example.
Account Number, Bank Name,IFSC/MICR Code,Branch
Mention the maximum limit per day. Mention it in words and also in figures.
The time for which the Mandate is effective. Period starting from. By default, ending period
is 31/Dec/2099.
Folio Number/Application Number/Mobile No and Email ID.
Your signature as per your Bank account.
 NACH OTM Mandate Form

How to register for NACH?

Fill in the NACH OTM Mandate Form.
Submit it to your advisor or Mutual Fund company (AMC)
OTM Form will be sent to your bank for registration
OTM Form will be confirmed in 10-12 days
Once your OTM is registered with a Mutual Fund company you can invest without issuing
cheques.

Investing in Mutual Funds using NACH OTM

Which Banks support NACH?

The list of banks activated for NACH system keep changing on regular intervals with
introduction of new banks. Presently, the NACH system is applicable to about 1000 banks. To
view the list of banks, you can visit NPCI website and download Excel file from Products &
Services > National Automated Clearing House > NACH Live Banks
What are advantages of registering Mutual Fund SIP through NACH?
1. Giving Mandate for Mutual Fund SIP using NACH will reduce the time for
registration of Mutual Fund SIP from 30 working days in normal ECS
registration to 15 working days. The time gets reduced because of
 1 Elimination of physical movement of mandate forms to destination bank
branch and work on scanned images
2 Registration online (through Bank Portal)
3 Positive confirmation of Registration as compared to today where 100%
confirmation is not received across participating banks
2. Due to the centralized and automated nature of the process, the probability of errors
is reduced significantly.
3. Since there are no paper-flows to the bank branches, there will be no more ECS
mandate not found related errors
4. You can also avoid any internet banking related issues for payment
5. Investors need not submit a physical cheque against each of their purchase
transaction. The amount will automatically get debited from the investors bank
registered with NPCI.

How does NACH benefits consumers, banks and organizations?

For Consumers:
Timely payment of bills /installments /premium without remembering the due dates.
Faster processing time and less manual intervention.

For Banks:
Less dependence on cheques and paper based transactions.
Faster processing time and less manual intervention.
Better service to customers and affiliate organizations.

For organizations:
Better customer service.
Timely dispersal of salaries, dividends and clearance of bills.
Facilitates automatic credit of variable benefits like allowances, scholarships etc.
Less dependence on cheques and paper transactions

Cheque: Clearing Process, CTS 2010

Cheque is like a written instruction to the bank asking it to pay the persons whose name is
written on cheque the sum of money. Cheque is just a piece of paper and to get the
money it has to be cleared.
Beginning January 1, 2013 Cheque Truncation System (CTS) was implemented, whereby flow
of the physical movement of cheque was eliminated in the truncation process. Instead an
electronic image of the cheque will be sent along with the relevant key information.

In this article we shall explain about how the cheques were getting cleared before January 1
2014, new CTS 2010 clearing process, new CTC 2010 compliant cheques, old cheques.

Cheque is like a written instruction to the bank asking it to pay the persons whose name is
written on cheque the sum of money. The person who writes the Cheque is called drawer
and to whom it is paid is called as payee.
So, now how is cheque cleared?

Let us say Ram gave an A/C payee cheque to Shyam. Let us see the sequence of events how
Shyam gets the money to his account:
1. Shyam deposits cheque to his bank.
2. Shyams bank processes the cheque and sends a request to Rams bank for payment
3. If Rams bank has funds in his account, his bank will process the payment and release the
 funds to Shyams Bank
4. Shyams Bank will process the payment and credits the funds into his bank account.

Clearing process for non CTC 2010 cheques

The Payee would deposit the cheque is his/her bank. If the payee or beneficiary of cheque
has an account in the same bank in the same city the funds are credited into his account
through internal arrangement of the bank
If the beneficiary has an account with any other bank in the same or in any other city, then
his banker would ensure that funds are collected from the payers banker through a
clearing house. A clearing house is an association of banks that facilitates payments
through cheques between different bank branches within a city / place. There are more than
1000 clearing houses operating all over the country facilitating cheque payments. These are
managed by the RBI, State Bank of India and other public sector banks. To identify the
paying bank, the clearing house looks at checks routing number, MICR, the nine-digit
number at the bottom of your cheque, to the right of your account number. It identifies
postal code/city and state of the origin of the cheque.

MICR of cheque
The clearing house presents paying bank with the cheque along with a payment request to
drawees bank, which checks if there are sufficient funds in the account of drawer to pay
money.
If the drawers bank decides to pay then the clearing bank proceeds to settle the check,
debiting drawers bank and crediting the payees bank for the value of the check. The
paying bank debits the amount from the drawers account.
 The clearing process is shown in following picture

Cheque Clearing Process before Jan 1 2013

Time taken to clear the cheque

How fast the money would be deposited into Shyams account depends on whether the
whether bank of Ram and Shyam cheques are of same city.

Based on this cheques are of two kinds:

Local Cheques These are cheques whereby the cheque issuer bank branch and the
receiver bank branch are in the same city
Outstation Cheques These are cheques whereby the cheque issuer bank branch and the
receiver bank branch are in different cities

Local Cheques All Local Cheques must be cleared on a T+1 basis. i.e., If I Deposit a local
cheque into my bank account today (irrespective of which bank the cheque is drawn or
deposited) the funds must reach my account by End-Of-Day Tomorrow. Of course, this is only
if the deposit happened before the cut-off time for today. For ex: Lets say ICICI Bank has a
cut of time of 1:00 PM. So, all cheques deposited after 1:00 PM the previous day and those
deposited before 1:00 PM today are processed in one batch and sent for payment. If you
deposit your cheque after 1:00 PM, it will be processed only tomorrow and funds will be
available one day after that.

Outstation Cheques Processing of Outstation Cheques depends on location of drawees

bank.
 Banks in State Capitals Max 7 days
Banks in Major Cities Max 10 days
Banks in Other Locations Max 14 days

RBIs Collection of Instruments has answers to questions like What happens if cheques /
instruments are lost in transit / in clearing process?, My bank refuses to accept outstation
cheques for collection. Is there any remedy?

In addition to this, some banks are notorious of doing money laundering in between. i.e. the
Money is debited from the issuer's account but is credited later and in between, they launder
the money for interest. Many a times, the cheque deposit boxes remain unattended for more
than a couple of days more in case of national holidays.

Cheque Truncation System CTS 2010

Cheque Truncation System (CTS) or Image-based Clearing System (ICS), in India, is

a project undertaken by the Reserve Bank of India RBI, for faster clearing of cheques.
CTS is basically an online image-based cheque clearing system where cheque images are
captured at the collecting bank branch and transmitted electronically. Truncation means,
stopping the flow of the physical cheques issued by a drawer to the drawee branch. The
physical instrument is truncated at some point en-route to the drawee branch and an
electronic image of the cheque is sent to the drawee branch along with the relevant
information like the MICR fields, date of presentation, presenting banks etc. So the process
now becomes:
In CTS, the presenting bank (or its branch) captures the data (on the MICR band) and the
images of a cheque using their Capture System (comprising of a scanner, core banking or
other application
The collecting bank (presenting bank) sends the data and captured images duly signed and
encrypted to the central processing location (Clearing House) for onward transmission to the
paying bank (destination or drawee bank). For the purpose of participation, the presenting
and drawee banks are provided with an interface / gateway called the Clearing House
Interface (CHI) that enables them to connect and transmit data and images in a secure and
safe manner to the Clearing House (CH).
The Clearing House processes the data, arrives at the settlement figure and routes the
images and requisite data to the drawee banks. This is called the presentation clearing. The
drawee banks through their CHIs receive the images and data from the Clearing House for
payment processing. The drawee CHIs also generate the return file for unpaid instruments.
 Image Clearing System

For customers clearing process of CTS 2010 is no different from the use of
traditional clearing infrastructure for clearing paper cheques. Customers continue to
use cheques as at present, except to:
Use image-friendly-coloured-inks while writing the cheques
Avoid any alterations or corrections thereon. For any change in the payees name, amount in
figures or in words, fresh cheque leaves should be used by customers, as this will facilitate
smooth passage through image based clearing system.
As images of cheques (and not the physical cheques) alone need to move in CTS:
It is possible for the removal of the restriction of geographical jurisdiction normally
associated with the paper cheque clearing. Hence cheques would be multi-city.
This would result in effective reduction in the time required for payment of cheques, the
associated cost of transit and delays in processing, etc.

The security, integrity, non-repudiation and authenticity of the data and image transmitted
from the presenting bank to the paying bank through Clearing House are ensured using the
Public Key Infrastructure (PKI). CTS is compliant to the requirements of the IT Act, 2000. It
has been made mandatory for the presenting bank to sign the images and data from the
point of origin itself. PKI is used throughout the entire cycle covering capture system, the
presenting bank, the clearing house and the paying bank. The PKI standards used are in
accordance with the appropriate Indian acts and notifications of Controller of Certifying
Authority (CCA).
Cheque truncation eliminates the need to move the physical instruments across branches,
except in exceptional circumstances, thus speeding up the process of collection or
realization of cheques. The Reserve Bank had implemented CTS in the National Capital
Region (NCR), New Delhi and Chennai with effect from February 1, 2008 and September 24,
2011. After migration of the entire cheque volume from MICR system to CTS,, the traditional
MICR-based cheque processing has been discontinued in these two locations. Based on the
advantages realised by the stakeholders and the experienced gained from the roll-out in
these centres, it was decided to operationalise CTS across the country by Jan 1 2013. For
more details read RBIs FAQ on Cheque Truncation System

Cheques for CTS 2010

 All types of cheques can be presented for clearing through CTS. But to achieve
standardisation of cheques issued by banks across the country and to reduce cheque frauds
set of benchmarks called as CTS-2010 standard are introduced.These include provision of
mandatory minimum security features on cheque forms like quality of paper, watermark,
banks logo in invisible ink, void pantograph, etc., and standardisation of field placements on
cheques. As shown in picture below (Ref: Economic Times Check your cheque status)

6. Branch address with IFSC code printed top of the cheque

7. Date in dd/mm/yyyy format with boxes
8. Printers name with CTS-2010 in left side of cheque
9. A pantograph which shows VOID/COPY while taking photocopy of the cheque below the
account number
10. New rupee symbol instead of bilingual format
11. Please sign above is mentioned on bottom right of the cheque
12. Watermark CTS INDIA to be visible cheque is held against any light.
13. Ultra Violet logo of Bank printed at upper left corner of cheque to be visible in UV lamps

CTS 2010 Standards

1. Paper (At Manufacturing Stage) - CTS-2010 Standard paper should not glow under
Ultra-Violet (UV) light i.e., it should be UV dull.

2. Watermark (At Manufacturing Stage) - All cheques shall carry a standardized

watermark, with the words CTS-INDIA which can be seen when held against any
light source.

3. VOID pantograph (At Printing Stage) - This feature should not be visible on the
scanned image at the resolution specified in CTS but should be clearly visible in
photocopies and scanned colour images as resolution used in such cases would be
above the prescribed CTS standards.

4. Banks logo printed with ultra-violet ink (At Printing Stage) - Banks logo shall be
printed in ultra-violet (UV) ink. The logo will be captured by / visible in UV-enabled
scanners / lamps. It will establish genuineness of a cheque.
5. Field placements of a cheque - Placement of significant fields on the cheque forms
shall be mandated. However, placement of additional fields shall be left to banks.
This will enable data capturing by Optical / Image Character Recognition (OCR / ICR)
engines in offline mode and help banks in automating their payment processes.

6. Mandating colours and background - Light / Pastel colours shall be mandated for
cheques so that Print / Dynamic Contrast Ratio (PCR / DCR) is more than 60% for
ensuring better quality and content of images. The colours will be finalized in
consultation with IBA / NPCI.

7. Clutter free background - Background of cheques shall be kept as clutter free as

possible for improving quality and clarity of images.

8. Prohibiting alterations / corrections on cheques - No changes / corrections should be

carried out on the cheques (other than for date validation purposes, if required).

9. Printing of account field - All cheques should, as far as possible, be issued with the
account number field pre- printed. This should be considered must for current
account holders and corporate customers.

10. Use of UV feature on cheque images - Though banks logo in UV ink is a strong
deterrent for forgery and duplicate cheques, there are challenges in terms of
increased image size, stabilization of UV technology in CTS environment, availability
of UV-enabled scanners, etc., in implementing this feature. However, the benefits
outweigh the limitations and hence this feature shall be incorporated.
 Sample old and new(CTS 2010 compliant) cheques issued by State Bank of
India (SBI) are shown below

State Bank of India Cheque before CTS 2010

SBI cheque with CTC 2010 compliance

Sample old and new(CTS 2010 compliant) cheques issued by HDFC bank are
shown below
 HDFC bank cheque before CTS 2010

HDFC bank cheque for CTS 2010

How does CTS 2010 affect customers?

If you have issued post-dated cheques (PDCs)(say for your home or auto loan EMIs), you will
have to issue fresh cheques.
If you have opted for the ECS (electronic clearing system) mode, the new system will not
impact you.
For issuing cheque after Mar 31 2013 you need cheques which are CTS-2010 compliant.
Shorter clearing cycle
Superior verification and reconciliation process
No geographical restrictions as to jurisdiction
Operational efficiency for banks and customers alike
Reduction in operational risk and risks associated with paper clearing
No collection charges for collection of cheque drawn on a bank located within the grid.
How does CTS 2010 benefit the banking system?
Grid Based CTS provides significant cost savings.
Consolidation of clearing locations into a few grids minimize the investment in MICR
machines and related AMC costs.
Banks will benefit from economies of scale as the grid CTS obviates the need for
establishing inward cheque processing infrastructure at various clearing locations.
With the merger of many local clearing houses with CTS grids, the settlements which
were earlier spread across numerous clearing house locations have been subsumed into
a single settlement, thereby significantly reducing the liquidity requirements for the
banks.
CTS will also result in other benefits in terms of reduction in the cheque processing fee,
reduction in operational overhead, elimination of clearing differences and reconciliation
issues etc.