A Classic Banking Lesson: The Fall of Karnali Development Bank

The collapse of Karnali Development Bank (KDBL) has produced nothing but dust. Undone by a toxic olvency, poor governance, and outright illegality, more than three-quarters of its promoter shareholders have been  wiped out. The episode is a reminder that in banking, a resilient balance sheet, risk discipline, prudence, and common  sense are not optional extras—it’s the holy grail.

KDBL’s downfall also exposes a deeper malaise in Nepal’s financial sector: the impulse to chase size and return for their own sake. Many banks, eager to keep pace with competitors, often  forget that growth purchased at the expense of underwriting standards is not ambition;  it is hubris. The industry’s pursuit of credit growth and returns, following NRB’s mandate to raise capital starting in mid-2017, has left several  institutions vulnerable, mistaking expansion for resilience. Hiring foreign consultants to clone a foreign bank’s growth strategy without keeping  an eye on risk made the entire industry sprint a 100-meter race blindfolded. Some may finish the race, but some may collide, too.

The central bank’s intervention carries  another message. “Moral hazard,” long taken for granted, may not be as reliable a friend as bankers once assumed. When  credit decisions are driven by connections rather than creditworthiness, and when  toxic loans pile up, solvency  and stability are at risk; regulators eventually lose patience.

Karnali is now the cautionary tale on every balance-sheet reviewer’s desk. And what Karnali faced, others could face too. As Jamie Dimon of J.P. Morgan  says, “When you see one cockroach, there are probably  more.”

We have seen  this before, and on far grander stages. The world had its dress  rehearsal in 2008,  when  lax lending almost toppled the global financial system. The script was already familiar: America’s savings-and-loan debacle of the 1980s, Japan’s asset-bubble bust in the 1990s, and the subprime calamity of 2008 all shared one flaw—real-estate loans sprayed out on feeble underwriting. When  prudence is abandoned, loans turn sour; when  loans turn sour, banks follow. It is a lesson taught in countless universities and carved  into the history books of finance. Yet, somehow, a few bankers here  seem not to have read the book.

The stock market has given its verdict. Several bank valuations now languish at multi-year lows, with many trading below their book value, as credit impairments seem less like a cycle and more like a condition. What appears seductively cheap  may, in fact, be a value trap. Markets may simply be pricing in what management prefers not to mention: governance decay, fresh asset-quality shocks, or a sector struggling to find credible  borrowers. A discount, after all, is sometimes less of a bargain than a warning label. Little wonder that the few banks with cleaner  balance sheets and lower non-performing loans command higher book multiples—a premium  not for growth, but for safety.

The private-sector credit boom has hit a wall. Lending grew at twice the pace  of nominal GDP for over a decade, surging 18.6% annually between the earthquake and the pandemic’s end. In 2020–21 alone, credit leapt by over a quarter. But the boom has hit the brakes. Monetary tightening in FY
2022/23, aimed at taming inflation and shoring up foreign reserves, slowed  growth to just 6.25% annualised. As the spigot closed, loans soured: non-performing advances jumped  to 5.26% by mid-October 2025, from 1.48% in mid-2021. Even evergreening, it seems, has its limits.

Banking stress may ease—whether through an economic rebound or more  accommodative policy. Yet the lesson  of this episode is immutable: prudence remains  non-negotiable.

(This opinion article was originally publihsed in December 2025 issue of New Business Age magazine.)