Nepal Rastra Bank (NRB) has closed nearly 400 loan accounts and around 300 deposit accounts of the troubled KRBL Karnali Development Bank. Declared problematic nine months ago and brought under NRB’s direct control, the bank shows little chance of recovery. The management team assigned by NRB is now exploring the option of “converting deposits into shares” to safeguard depositors’ interests. However, with liabilities far outweighing assets, finding a solution has become increasingly difficult.

Gap Between Assets and Liabilities

According to the NRB-appointed management team, Karnali Development Bank’s total assets amount to just NPR 2.45 billion. In contrast, the bank has liabilities of over NPR 4.33 billion. This leaves a shortfall of about NPR 1.88 billion, making it extremely difficult to bring the bank back to normal operations, experts have warned.

The bank was declared problematic on December 25, 2024 (Poush 10, 2081) and has been under NRB’s direct supervision since the following day. Over this period, the case has exposed not only the bank’s internal weaknesses but also shortcomings in financial oversight and regulatory mechanisms.

Situation of Depositors

Karnali Development Bank has around 107,000 depositors with total deposits of NPR 4.64 billion. At present, the likelihood of depositors recovering their full amounts has become increasingly remote. From the funds recovered so far, depositors have only been allowed partial withdrawals, ranging from a minimum of NPR 5,000 to a maximum of NPR 30,000. The higher withdrawal limit applies only in special cases such as medical treatment.

So far, the NRB-led team has recovered about NPR 600 million in loans. This recovery has mostly come from small borrowers — around 450 clients with loans of less than NPR 10 million each. Recovery of larger loans remains challenging, though some loans of up to NPR 140 million are still in process.

Embezzlement and Investigation

Meanwhile, the Central Investigation Bureau (CIB) of Nepal Police has revealed large-scale embezzlement worth NPR 3.2 billion at the bank. This includes NPR 1.8 billion in loans and NPR 1.6 billion in cash and shares misappropriated. A case related to this has already been filed in the district court.

Experts believe this is not just the failure of a single bank but also the result of weak regulatory oversight. The fact that such massive embezzlement took place has exposed fundamental flaws in the bank’s management and control system.

Economists have warned that the crisis at Karnali Development Bank could undermine public confidence in small development banks, especially in rural areas. Unlike large commercial banks, these smaller financial institutions play an important role in local economies by mobilizing savings and providing credit. A loss of trust in them could directly affect rural livelihoods and financial stability.

While NRB has proposed converting deposits into shares as one possible solution, this does not appear to be a practical option for ordinary depositors. Converting deposits into equity would mean depositors lose immediate access to their funds, leaving those who need cash urgently — such as for health expenses — without relief.