Karnali Development Bank declared as a "problematic institution"

KATHMANDU, DECEMBER 25: The Nepal Rastra Bank (NRB) has declared the Karnali Development Bank as a "problematic institution." The financial institution, based in Nepalgunj and licensed as a "B" class entity by NRB, has been designated as such due to significant operational and financial deficiencies.

This decision was made during a meeting of the NRB Board of Directors, in accordance with Section 86(B) of the Nepal Rastra Bank Act, 2058. Additionally, under Section 86(C) of the same Act, the management of Karnali Development Bank Limited os placed under the control of NRB until further notice.

To manage the institution, NRB has also formed a three-member team led by Tika Ram Khatri, Deputy Director of the Banks and Financial Institutions Regulation Department. Other two members are Bishnu Kumar Bishwakarma, Deputy Director of the Financial Institutions Supervision Department, and Jugal Kishore Kushwaha, Deputy Director of the Legal Department. This group will assume its responsibilities starting tomorrow (Dec. 26)

The management team is empowered to perform the roles and responsibilities of the Board of Directors and the institution’s special general assembly. These responsibilities, executed under the Nepal Rastra Bank Act, 2058 B.S the Banks and Financial Institutions Act, 2073 B.S, and other relevant laws, include ensuring timely payments to depositors, prioritizing the recovery of outstanding loans, conducting a thorough financial audit of the institution, and investigating any financial irregularities. If necessary, legal actions will be pursued based on the findings of these investigations.

The NRB's latest intervention came after determining that Karnali Development Bank’s continued operations in its current state posed significant risks to depositors and public trust in the banking system. The institution failed to maintain the minimum capital adequacy ratio, displayed weak institutional governance, faced suspicions of financial misconduct, and struggled with liquidity issues. This all eventually rendered it unable to fulfil its deposit liabilities. The bank’s financial condition was further deteriorated by a non-performing loan ratio of 40.85%, indicating severe distress.

In light of this, the central bank implemented prompt corrective action under Regulation 3 of the "Nepal Rastra Bank, Banks, and Financial Institutions Prompt Corrective Action Regulations, 2074," effective from November 26. This measure aims to safeguard the interests of depositors, restore confidence in the banking system, and stabilize the institution’s financial condition.