India’s game-changing National Automated Clearing House (NACH) platform will boost treasury operations for both local and foreign companies, especially in the area of working capital and supply chain management.
Vodafone India, one of the nation’s biggest telecommunications service providers and two fund managers, HSBC Asset Management and Reliance Capital Asset Management (RCAM) are the first customers to use this new infrastructure, according to HSBC in a press release on May 15.
The NACH system, which is seen as a big improvement on the existing Electronic Clearing Services (ECS), enables pan-India processing of bulk payments and receipts. It also has the capacity to manage mandates – which are written authorisations by a person to another to take certain course of action – electronically.
“The NACH is going to be an added value to today’s corporate treasurer. Today, the ECS mandate takes as long as about 25 days to register whereas under the NACH, the mandate will get registered within 48 hours. It is something that is in a very simplified form and could have various features built into it to have additional information,” said Ravi Ambika, head of products South Asia to Asiamoney PLUS in a telephone interview on May 23.
The sponsor bank – where the beneficiary has an account – the remitter bank – which is where the money originates – and the National Payments Corporation of India (NPCI) – the payment house – will work together on a mandate management system for corporates.
Companies are able to leverage a central system to help collect all types of payments. A corporate, for example, can upload a file through one bank to debit accounts for payments at all banks and transactions will be settled the same day, highlight experts.
The fact that transactions can be settled on the same day with the NACH as oppose to the ECS system where funds for payment needs to be in a day earlier means that the working capital cycle of corporates can be substantially reduced. Also supply chain management will be further enhanced.
“In ECS credits, corporate needs to fund the account a day before required payment date, whereas in NACH credit, same day funding is possible. Similarly, in ECS debits, corporate needs to provide debit transaction information at least three to four days in advance of the debit date, which is difficult for corporates to provide. In NACH Debits, corporates needs to provide this information only a day in advance,” said Navin Gupta, head of payments and cash management in India at HSBC to Asiamoney on May 24.
“The NACH completely crunches a corporate’s working capital cycle which could be anything between three to seven days depending on the location of the branch before, to a same day level. It will impact the working capital borrowings of the corporate and will reduce the need to have much excess cash and will enhance the visibility of the cash flow,” said Ravi.
“This can tie in to the dealer management system of the corporate, where its marketing team could receive email alerts and estimates showing that they have received the money and they can dispatch the goods as soon as possible,” she added.
The ECS system is only available in 89 locations throughout India whereas under the NACH, approximately 82,000 branches of various banks are getting covered under one core platform. Currently, six banks are signed up for the debit side of the latter system while on the credit side, 34 financial institutions are participating [refer to the bottom], note market participants.
The NPCI, which was set up in 2008 and has oversight of all transaction processing infrastructure, aims to add most of the large banks – both global and local – by the third quarter of this year.
“NACH will have national coverage, similar to the existing high-value payments infrastructure in India.There are a few banks that have joined in but eventually all the banks will be on-boarded. Wider coverage implies that corporates will be able to reach out to their customers across the country and make their working capital management more efficient,” said HSBC’s Gupta.
"ECS is a location-wise clearing, with each location having a different clearing cycle. This can take two to four days whereas, NACH is a centralised India wide clearing, with same day settlement,” he added.
Standards applied
To unlock the value of ongoing payments landscape enhancements in India, industry participants will need to evaluate and align industry standards.
Most corporations currently use different communication formats with their banks. The NACH will promote a single format based on SWIFT ISO 20022 standards. This means corporations can use one format for all types of transactions.
“ISO standard files in NACH implies that corporates can adopt standard processes across countries and India will be able to support the same processes. They need not establish separate processes for India specifically,” said Gupta.
“Also, the current infrastructure that India has doesn’t carry information with the payment. For example, if you receive payments, you would not know what it is for or who made the payment. The NACH ISO formats allow for capturing richer data to plug this gap, which banks can then pass on as additional information in their customer statements," he added.
Once the transition is complete, corporations will also be able to upload bulk files for any system. Integrating the format and new processes into their enterprise resource planning (ERP) system will enable corporations to concentrate more on their business, rather than on transaction processing.
“With NACH, you know who exactly you are collecting the funds from. From that account reconciliation perspective, that speeds up cash collection, and enables a corporate to release further credit to its customers,” said Swee Siong Lee, global head of global corporate products, transaction banking at Standard Chartered.
Banks live on NACH credit: Abhyudaya Co-operative Bank, Andhra Pragathi, Axis Bank, Bank of America-Merrill Lynch, Bank of Maharashtra, Canara Bank, Catholic Syrian Bank, Central Bank of India, Citibank, Corporation Bank, Federal Bank, Gopinath Patil Parsik Janata Sahakari Bank, Gurgaon Gramin Bank, HDFC Bank, HSBC, Indusind Bank, ING Vysya Bank, Janakalyan Sahakari Bank, Kalupur Commercial Bank, Karnataka Vikas, Kotak Mahindra Bank, North Malabar, Prathama Bank, Punjab National Bank, Standard Chartered Bank, State Bank of Mysore, The Sahebrao Deshmukh Co.op. Bank, The Shamrao Vital Co-operative Bank, The Yes Bank, UCO Bank, Union Bank of India, United Bank of India, Vijaya Bank and Deccan Gramin Bank.
Banks live on NACH debit: Central Bank of India, Citibank, HDFC Bank, HSBC, Kotak Mahindra Bank, Standard Chartered Bank.