Nepal Rastra Bank (NRB) has initiated an unprecedented restructuring process to save the troubled Karnali Development Bank, which had reached a point where it could no longer return depositors’ savings. With the bank facing a severe liquidity and governance crisis, the central bank has stepped in to redesign its ownership, management, and operational framework under a new model never before implemented in Nepal’s banking history.

The first phase of the intervention has already seen NRB reduce the share value of individuals accused of financial misconduct to just one percent. Shares held by former promoters, board members, and those allegedly involved in large-scale misappropriation have been diluted almost entirely, effectively clearing 99 percent of the bank’s ownership structure. NRB officials say this step was necessary to create room for new ownership and to protect the interests of the ordinary public whose deposits were at risk.

Tikaram Khatri, the deputy director of NRB and coordinator of the newly formed Karnali Bank Management Group, said the primary objective of the restructuring is to safeguard depositors and prevent the bank from collapsing. According to him, converting depositors’ savings into equity shares emerged as the only viable alternative to revive the institution. This marks the first time in Nepal that depositors are being prepared to become shareholders as part of a formal bank rescue mechanism.

Khatri explained that the restructuring will unfold in three stages. The first involves reducing the shares of accused individuals, which NRB has already executed. The second focuses on transforming depositors into shareholders with their consent, allowing them to gain ownership rights and future potential benefits as the bank recovers. NRB is currently briefing depositors about this model, highlighting both the advantages and obligations associated with equity ownership.

With the bank’s shareholding almost entirely vacated, NRB has now moved towards the third stage—seeking new investors and establishing a fresh management team. Khatri noted that the bank’s name, board composition, executive leadership, operational area, and overall corporate structure will all undergo significant changes. Once revitalized, Karnali Development Bank could even operate as a national-level development bank depending on its capital adequacy after restructuring.

Karnali Development Bank entered crisis following allegations of massive financial misappropriation. The Central Investigation Bureau (CIB) filed a case against 109 individuals, accusing them of embezzling around NPR 3.20 billion. The High Court bench in Nepalgunj ordered the judicial remand of former founding chairman and CEO Rajendra Bir Rai, former chairperson Pashupati Dayal Mishra, and finance chief Bed Prakash Singh Thakuri. A staff member of NRB, Bhuvan Basnet, was released on bail.

Established in 2003 (2060 BS), the bank operated 19 branches across Banke, Bardiya, and Dang districts. It had accumulated deposits amounting to NPR 4.65 billion and loans exceeding NPR 2.93 billion. The bank’s collapse posed a serious threat to financial stability and public confidence, prompting the central bank to intervene directly.

NRB officials believe that if the three-phase restructuring is successfully implemented, Karnali Development Bank will re-emerge with new ownership, new governance, and an entirely new identity. The case is also expected to set a precedent for resolving troubled banks in Nepal, establishing a model that prioritizes depositor protection and systemic stability.