You need to pay EMIs or Equated Monthly Instalments after taking a loan, such as a home or a personal loan. Unfortunately, we are so preoccupied with our private and professional relationships that remembering the EMI date can sometimes be challenging. Missing an EMI date may result in disciplinary action, and frequent late payments can harm your credit rating. This is where Electronic Clearing Service or ECS comes into the picture.
Borrowers in India can now use the Electronic Clearing Service (ECS) to avoid this inconvenience. But, first, let us explore this facility and how it operates.
The RBI established the Electronic Clearing Service to facilitate bulk funds transfers from one bank account to another. Loan providers utilise this facility to debit loan EMIs from the borrower’s bank account on a set date.
This is accomplished using a clearinghouse. ECS debit in India is handled mostly by the National Automated Clearing House – NACH. The NACH is a part of the National Payments Corporation of India – NPCI.
Electronic Clearing Service is classified into two types: ECS credit and ECS debit. Continue reading to find out what they are and how they differ from one another.
1. ECS Credit: When a bank makes credit to a bank account, such as to pay a salary or dividends. To credit multiple accounts, a single account is debited at regular intervals.
2. ECS Debit: When a single account is used to make payments such as EMI, loans, premiums, mutual funds, etc.
Electronic Clearing Service (ECS) are classified into three types based on their geographical location:
When a customer applies for a loan, they must sign an Electronic Clearing Service payment mandate. This mandate authorises the clearinghouse to debit your month-to-month EMI from your bank account and credit it to their loan or lender’s account on a predetermined date.
This authority will include specifics about your bank, regional office, Electronic Clearing Service debit date, and sum.
To enjoy the benefits of this system, a user must follow a few simple steps. To begin, notify the bank that you use. Second, a user provides a mandate that authorises the organisation to conduct future transactions. In most cases, the mandate includes specific information about the client’s bank account and department.
The bank only monitors transactions and sends alerts when funds are added or withdrawn from the account. The latter could be a text message or an application notification.
On the other hand, a payment processing organisation must handle all the details. They include the amount debited or credited to the bank account, the transaction date, and other important payment information.
Electronic Clearing Service users can also make a few changes. For example, they may specify the amount that can be withdrawn from an account, the purpose of transactions, and the effective date for each.
The RBI has indicated that the sponsoring bank must pay the transaction fees. Destination departments have already been informed to provide free Electronic Clearing Service credit to beneficiaries. Therefore, one will not be charged any additional fees as a recipient.
Electronic Clearing Service has advantages for both firms and people:
1. For Financial Institutions
2. For Customers
3. For Organisations and Institutions
If you want to stop Electronic Clearing Service debit from your bank account for whichever reason, you must first notify the financial institution. Next, a documented application in the format specified by the loan provider must be submitted. Once this is completed, they must notify their bank by submitting a formal request.
Apply to the bank/NBFC to stop ECS at least a few weeks before their EMI debit date so that the required changes can be implemented on time.
Also Read: Loan Moratorium In Banking: Explained
To set up an ECS in Banking mandate, contact your bank and complete the following steps:
NACH – The National Automated Clearing House is a clearing house run by the National Payment Corporation of India. While both NACH and Electronic Clearing Service are used for recurring payments, NACH is faster, more robust, and is used for larger transactions. Transactions in ECS take 3-4 working days, whereas NACH transactions are processed the same day. Many large organisations prefer NACH due to its enhanced security features, advanced dispute mechanisms, and speed; however, Electronic Clearing Service has a greater reach and relation.
Electronic Clearing Service allows simultaneous transfer of funds from one account to multiple other accounts.
ECS can be used for any type of bulk payment, such as interest, pension, dividend, salary, or recurring monthly bills. In addition, using Electronic Clearing Service, payments for insurance premiums or mutual funds can also be auto-debited after a predetermined time frame.
Ans: Yes. If any of the information in the mandate changes, the beneficiary must notify the User Institution so that the correct information can be incorporated into its documentation.
Ans: No, there is no restriction on the number of transactions made.
Ans: When one records a transaction they intend to pay electronically, it is posted to a temporary holding account. For example, a clearing account or a suspense account is a holding account. This account holds the payment until they are ready to build a billing file to upload to their bank for processing.
Ans: The Reserve Bank of India’s (RBI) Electronic Clearing Service facility is a well-established, secure, and hassle-free system for receiving and paying the above sums. Through the RBI, this system connects your bankers to the bankers of your service providers or corporations where you have invested your money.
Before you go…
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.