KATHMANDU, Dec 26: Nepal Rastra Bank (NRB) has decided to take over the management of Karnali Development Bank (KDBL) by declaring the B class financial institution as crisis-ridden.
The NRB has formed a three-member management team led by the deputy-director of the Banks and Financial Institutions Regulation Department, Tikaram Khatiwada, to take over the management of the Nepalgunj-based development bank. Bishnu Kumar Bishwakarma, deputy-director of the Financial Institutions Supervision Department and Jugal Kishor Kushwaha, deputy director of the Legal Division of the NRB are among the members of the central bank’s task force. The team will work as per the NRB’s decision effective from Thursday.
The panel has been mandated to carry out repayment of the depositors’ amount at the KDBL, recover the loans from the KDBL’s borrowers, and initiate necessary work to conduct due diligence audit and investigation of the financial misappropriation that took place in the organization. Likewise, the NRB has also delegated the task force with the authority to carry out special general meetings of the KDBL board while taking necessary decisions.
The NRB in its press release stated that the KDBL failed to maintain the minimum capital adequacy ratio as prescribed by the regulatory body. The central bank also accused the KDBL of weak institutional good governance, being involved in suspected financial misappropriation and facing poor liquidity conditions.
“Based on the study of the development bank’s information on financial embezzlement, it is found that it might not secure interest of the depositors, while it could also weaken the trust of the general people towards the country’s banking system,” reads the NRB’s press statement. “Due to these reasons, the central bank is obliged to declare the organisation problematic to safeguard the interest of the general public.”
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The NRB has further justified its action against the KDBL, stating that the organization is developing problematic symptoms as it fails to maintain minimum capital adequacy while its non-performing loan has also gone up as high as 40.85 percent.
On November 26, the NRB imposed severe restrictions on the KDBL, barring it from accepting deposits and issuing new loans citing the critical financial issues that the development bank developed during the onsite inspection carried out by the central bank.
The financial report for the first quarter of the current fiscal year unveiled by the KDBL paints a dismal picture. The bank recorded a net loss of Rs 19.8 million during the three-month period, which reflects that the organisation is struggling to generate sustainable revenue for its operation.
According to the NRB, it has invoked clause-3 of the "Prompt Corrective Action Regulations, 2017" to safeguard the interests of depositors and the general public. As provisioned by this directive, the KDBL was supposed to get a six-month period to improve its financial indicators. However, the NRB’s action evolved before the prescribed period citing the critical financial status of the development bank.
Previously in 2014, the NRB took over the management of Gurkha Development Bank after it faced exorbitant liabilities to institutional depositors, including the central bank itself, Rastriya Beema Sansthan and Citizen Investment Trust.
In 2009, the NRB took Nepal Development Bank into liquidation after the development bank faced financial crisis due to an asset-liability mismatch problem. The development bank was found providing excessive loans to its officials.
What happens to the share transaction of KDBL following the NRB action?
After Nepal Rastra Bank (NRB) declares the KDBL as problematic and takes control of its management, it will affect the share transaction of the development bank in the secondary market.
According to Section 86 (c) of the NRB Act 2002, the voting rights or other rights of the shareholders of the bank will be suspended after the central bank declares banks and financial institutions as crisis-ridden. It will curtail the rights of the shareholders of the bank to carry out the share trading.
Likewise, the NRB’s action will also prohibit the distribution of dividends or other amounts to shareholders to increase capital. Earlier, the NRB prohibited the bank's right to accept deposits and extend loans from November 26.
According to the NRB Act, with the action into effect, the central bank can sell the bank's assets and close branch offices as needed. Likewise, the regulator can fulfill the KDBL’s financial obligations by selling the assets, and control all operations by sending employees from the central bank. If necessary, the NRB can also restructure the KDBL.
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