Karnali Development Bank declared 'troubled institution'

Kathmandu, Dec. 26: Nepal Rastra Bank (NRB) has declared Karnali Development Bank Limited (KDBL) a 'troubled institution' under Section 86(b) of the Nepal Rastra Bank Act, 2058. 

The NRB informed in a statement that a meeting of its board of directors on Wednesday made a decision to this effect.

The NRB has taken control of the bank’s management under the same provision until further notice, and formed a three-member management team led by Deputy Director of the central bank's Banks and Financial Institutions Regulation Department, Tikaram Khatri, including Deputy Directors Bishnu Kumar Bishwokarma of Financial Institutions Supervision Department and Jugal Kishor Kushwaha of Legal Department, to oversee the operations of KDBL. 

The management team formed on Wednesday will assume its responsibilities from Thursday, December 26. The central bank has granted the team authority to manage the institution's board, special general meetings, and other functions under the NRB Act, the Banks and Financial Institutions Act (BAFIA), and other applicable laws.

According to the NRB, the primary focus of the team will be to protect public interests by prioritising deposit payments and loan recovery. "Additionally, the team has been tasked with conducting due diligence audits, investigating financial irregularities, and initiating legal action as required," it said. 

NRB’s investigation revealed several issues with KDBL, including failure to maintain the minimum capital adequacy ratio, poor corporate governance, financial irregularities, and liquidity problems. The Nepalgunj, Banke based regional development bank (a class 'B' bank charted by the NRB) has been unable to meet its deposit obligations, leading to concerns about safeguarding depositor interests and maintaining trust in the banking system which forced the NRB to overtake its management and operations.

KDBL has a paid-up capital of Rs. 502.8 million and operates branches in Banke, Bardiya, Dang, Pyuthan and Rolpa. It has mobilised Rs. 5.21 billion in deposits and Rs. 3.81 billion in loans. As of the end of first quarter of the current fiscal year 2024/25, the bank reported a net loss of Rs. 19.8 million. 

However, the NRB found that the bank's non-performing loans exceeded 40 per cent – a massive mismatch with the bank's reporting of NPL ratio at just 7.27 per cent. Under these pretexts, the central bank had already initiated prompt corrective action on the institution from November 27 this year under Regulation 3 of the Prompt Corrective Action Regulation, 2074. The bank was established 21 years ago. Its market capitalisation has reached Rs. 4.07 billion on Tuesday. 

Meanwhile, the share price of this troubled financial institution was Rs. 810 on Tuesday with 4.27 per cent growth in a day. But P/E (price to earnings) ratio of its shares is -51.36 while its EPS (earning per share) is also negative by 15.77.