NRB’s Bold Rescue of Karnali Development Bank: Depositors to Take Ownership as Historic Reform Model Unfolds

In a decisive intervention aimed at preventing one of Nepal’s longstanding regional development banks from collapsing, Nepal Rastra Bank (NRB) has initiated a sweeping restructuring plan for Karnali Development Bank. The move, unprecedented in the country’s financial history, comes after the bank reached a state where returning depositors’ savings was no longer possible, raising the specter of a full-scale institutional failure and public panic.

NRB’s restructuring blueprint begins with a dramatic dilution of ownership. Shares held by former directors, managers, and individuals accused of engineering massive financial misconduct have been slashed to just one percent of their original value. This measure effectively erases the hold of those suspected of misappropriating billions, clearing the path for a new ownership structure untainted by past governance failures.

According to Tikaram Khatri, deputy director of NRB and coordinator of the special management group formed to rehabilitate the bank, the restructuring is being executed in three distinct phases. The first—stripping implicated individuals of their shareholding—has now been completed. The second, and far more sensitive stage, involves transforming depositors into shareholders, a strategy that NRB believes is the only viable route to protect public money while reviving the institution.

Khatri explained that this conversion of deposits into equity is not merely an accounting exercise but a long-term investment in restoring public trust. Depositors, many of whom had resigned themselves to losing their savings, are being briefed on how share ownership could allow them to recover value over time as the bank regains stability. The central bank is currently engaging with depositors to secure their consent—a process Khatri calls “the heart of the restructuring.”

With nearly 99 percent of the bank’s shares wiped clean, NRB has now turned its attention to the third phase: attracting new investors and installing a fresh leadership team. Every core element of the bank—its name, management, governance, service area, and even its developmental classification—is set to change. Khatri suggests that, depending on post-restructuring capital strength, the bank could emerge as a national-level development institution rather than a regional one confined to three districts.

The crisis at Karnali Development Bank did not arise overnight. A Central Investigation Bureau (CIB) probe last year revealed that more than NPR 3.20 billion had been siphoned off through coordinated financial manipulation involving former executives and staff. The resulting charge-sheet implicated 109 individuals, including founding chairman and CEO Rajendra Bir Rai, former chairperson Pashupati Dayal Mishra, and finance chief Bed Prakash Singh Thakuri. The High Court in Nepalgunj ordered their judicial remand, signaling the gravity of the wrongdoing.

The bank, established in 2003, had once served as a significant financial institution across Banke, Bardiya, and Dang districts, operating 19 branches. At the time of the crisis, it held deposits worth NPR 4.65 billion and loans exceeding NPR 2.93 billion—figures that highlight the magnitude of public exposure. When such a large institution falters, the consequences ripple beyond depositors, threatening regional credit flows, small businesses, and local economic stability.

Financial analysts argue that NRB’s intervention reflects a maturing regulatory environment in which failed governance is no longer tolerated and depositor protection is prioritized. Converting deposits into equity may appear unconventional, but experts note that the model mirrors global practices used to rescue systemically important institutions during crises. The approach also places accountability where it belongs—on those responsible for mismanagement—while offering depositors a structured path toward financial recovery.

If the three-phase restructuring succeeds, Karnali Development Bank will re-emerge as a completely transformed institution—one with new owners, new leadership, and a renewed mandate. For Nepal’s banking sector, the case may become a landmark example of how regulators can revive failing institutions without resorting to blanket bailouts funded by taxpayers.

NRB officials say the coming weeks will be decisive. Depositors must be convinced, investors must be identified, and a governance model must be rebuilt from the ground up. If executed effectively, the Karnali crisis may evolve not into a story of collapse, but into a turning point in Nepal’s journey toward stronger financial discipline and regulatory maturity.