NRB explores new founding investors to revive Karnali Development Bank after share conversion plan stalls

KATHMANDU: Nepal Rastra Bank (NRB) is preparing a new strategy to revive the troubled Karnali Development Bank, shifting its focus toward bringing in new founding shareholders after its earlier proposal to convert depositors into equity holders stalled due to regulatory hurdles.

The central bank had initially planned to restore the institution by issuing shares to depositors, but the process has been delayed because of pending approval from the Nepal Securities Board (SEBON). With uncertainty surrounding the securities regulator’s leadership and approval process, NRB has now begun working on an alternative recapitalization model.

According to Tikaram Khatiwada, coordinator of the management committee appointed by Nepal Rastra Bank to oversee Karnali Development Bank, discussions are underway at the central bank’s senior management level to attract new founding investors and inject fresh capital into the financially distressed institution.

“If the depositor-to-share conversion plan receives approval from the Securities Board, that is welcome. Otherwise, we are simultaneously preparing another option by bringing in new founding shareholders,” Khatiwada said.

SEBON approval delays revival plan

The proposal to convert depositors into shareholders had been developed with the consent of both Nepal Rastra Bank and the affected depositors. However, implementation has been delayed because the plan requires approval under securities laws.

Khatiwada argued that institutions declared problematic by Nepal Rastra Bank should not remain unable to resume operations simply because of delays under securities regulations.

“The institution’s revival should not be held back by procedural delays under the securities framework after the central bank has already declared it a problematic institution,” he said.

Governor calls for greater regulatory authority

Nepal Rastra Bank Governor Biswo Nath Paudel has also acknowledged that the central bank’s legal authority is limited when dealing with distressed financial institutions.

Speaking recently, Governor Paudel said the central bank often has to wait for approvals from other regulators before implementing restructuring measures, delaying timely intervention.

He stressed that Nepal’s legal framework should provide the central bank with broader powers to rehabilitate troubled banks and financial institutions without requiring multiple regulatory approvals for critical restructuring decisions.

According to him, sensitive financial sector interventions should not be unnecessarily delayed because of overlapping regulatory jurisdictions.

Plan aims to raise around Rs 4 billion

If the depositor share-conversion plan remains stalled, Nepal Rastra Bank intends to restructure the bank by issuing rights shares to existing shareholders while simultaneously bringing in new institutional founders.

Khatiwada said the recapitalization plan targets raising approximately Rs 4 billion, which would provide sufficient capital to restart banking operations.

Under the proposed structure, newly issued founder shares would be sold at the face value of Rs 100 per share, in accordance with the Bank and Financial Institutions Act (BAFIA), which requires banks issuing new shares to the public to sell them at par value.

The proposal envisions allocating up to 70 percent ownership to new founding shareholders.

He added that, under existing NRB regulations, founder shares could subsequently be converted into ordinary public shares at an annual rate of up to 10 percent, allowing greater public participation over time.

However, Khatiwada clarified that Nepal Rastra Bank’s Board of Directors has not yet taken a formal decision on bringing in new founding investors.

Capital eroded after financial irregularities

The restructuring proposal follows findings from a due diligence audit commissioned by Nepal Rastra Bank.

According to the report, the bank’s paid-up capital has fallen from Rs 500 million to just Rs 290 million after authorities reduced the value of shares held by individuals involved in financial misconduct.

The audit concluded that the bank would need to revise its authorized, issued and paid-up capital before operations could resume.

More seriously, the report alleges that the bank’s directors and senior executives misappropriated approximately Rs 1.27 billion.

Investigators found that large sums of cash were either withdrawn without proper accounting or recorded in the bank’s books without the corresponding cash actually being deposited, resulting in significant financial losses.

Net worth deeply negative

The due diligence audit paints a bleak financial picture.

According to the report:

• The bank’s net worth stands at negative Rs 2.46 billion.
• Around 95 percent of its loan portfolio has become non-performing.
• Total liabilities exceed total assets by roughly 25 percent.
• Liquidating the bank would still leave approximately 25 percent of depositors unpaid.

Currently, the bank holds approximately Rs 4.30 billion in deposits, while its assets—including loans—are valued at around Rs 3.65 billion.

Given the gap between assets and liabilities, Nepal Rastra Bank believes liquidation would not adequately protect depositors.

Merger or restructuring recommended

The due diligence report concludes that simply selling the bank’s assets would not restore its financial health.

It further states that Karnali Development Bank is unlikely to operate sustainably as a development bank in its current form and recommends either reducing its operational tier, injecting substantial fresh capital, or pursuing a merger with another financial institution.

The central bank has previously explored providing emergency liquidity support under its “lender of last resort” facility. However, officials ruled out that option after determining that the bank’s exceptionally high level of bad loans made such assistance ineffective.

Depositor protection remains the priority

Nepal Rastra Bank says its primary objective is to protect depositors and preserve financial stability.

Since liquidation would leave thousands of depositors facing losses, the regulator is pursuing restructuring options that would enable the institution to resume operations and gradually repay depositors.

Whether through conversion of deposits into equity, induction of new founding investors, or a combination of both, the central bank is seeking a sustainable solution that restores confidence while addressing the bank’s severe capital deficit and governance failures.