Nepal Rastra Bank (NRB) has initiated discussions to upgrade the troubled Karnali Development Bank into a national-level bank by increasing its capital. The bank was declared problematic on January 10, 2025, after it collapsed under liabilities amounting to Rs 4.3 billion.

A three-member NRB team based in Nepalgunj has been managing the bank since then, overseeing liability reduction, repayment to some depositors, and internal restructuring.

Liabilities Exceed Assets

The bank owes Rs 4.3 billion, while its total assets — including deposits and recoverable loans — stand at only Rs 2.3 billion. This leaves a gap of Rs 2 billion, creating a major challenge for NRB to protect depositors’ funds.

According to Tikaram Khatri, Deputy Director of the Bank and Financial Institution Regulation Department and onsite management head, NRB is exploring options to bridge this gap, including converting depositors’ savings into equity shares. However, recapitalization remains the key requirement to transform the bank into a national-level institution.

Recapitalization Plans

Currently, the bank’s paid-up capital stands at Rs 502.8 million, with 49% held by the public and 51% by promoter shareholders. NRB is considering canceling promoters’ shares and redistributing them to depositors, while also exploring auction sales to attract new investors.

The central bank aims to raise the bank’s capital to Rs 2.5 billion, in line with regulatory requirements for development banks. Once achieved, the bank would be removed from the troubled list and resume normal banking services.

NRB officials noted that misappropriated funds worth billions are also expected to be recovered, which would strengthen the bank’s reserves and financial position.

Legal Proceedings

Meanwhile, the Central Investigation Bureau (CIB) has filed cases against 109 individuals in connection with the Rs 3.2 billion misappropriation scandal at the bank. The District Government Attorney Office, Banke, has already lodged the case in Nepalgunj.

Among those charged are the bank’s founding chairperson Rajendra Bir Rai, former chairperson Pashupati Dayal Mishra, Finance Department head Bed Prakash Singh Thakuri, and former NRB staffer Bhuvan Basnet, all of whom are in custody. Many other accused remain at large. Investigations have also revealed the bank’s involvement in misappropriating funds through cooperatives.