Five years after the Nepal Rastra Bank (NRB) declared it crisis-ridden, Gurkha Development Bank has been downgraded into a finance company.

After the bank’s merger with Kathmandu Finance, formal operations of the merged entity—Gurkhas Finance Limited—began on Sunday.

Clause 37 of Bank and Financial Institution Act (Bafia) allows the central bank to downgrade financial institutions.

The central bank, which had taken over the development bank’s management two years ago, had removed Gurkha from the list of crisis-ridden financial institutions on March 16, the same day the NRB gave its go-ahead for the merger.

Mukti Sapkota, NRB-assigned coordinator of the bank’s management committee, said the new board has taken over the merged entity and the NRB team will depart in one-two days.

Mahendra Lal Rai is the chairman of new institution. The new board has four members representing Kathmandu Finance and two representing Gurkha Development Bank.  

Sapkota said the board members representing the Kathmandu Finance group have been confirmed, while those from Gurkha have not been decided as of Sunday.

Gurkhas Finance now has a paid-up capital of Rs570 million, with Gurkha contributing 200 million and Kathmandu Finance contributing Rs370 million.

After per the share price of Gurkha—Rs30 per unit based on the due diligence audit—the value of its total shares was reduced to Rs198 million. “After the adjustment of share value of Gurkha based on its financial situation, the door was opened for merger,” said Sapkota. “The merger took place based on 1:1 swap ratio.”

The group representing Kathmandu Finance was the same group of investors that had wanted to enter Gurkha two years ago. They had deposited Rs200 million at NRB for their potential entry into the crisis-ridden development bank. But they later acquired Kathmandu Finance and entered Gurkha finally through the merger, according to Sapkota.

With the new team now handling Gurkhas Finance, NRB has not barred any of the former promoters of Gurkha Development Bank from becoming board members of the new institution as long as it is in compliance with Bafia.

“There will no longer be big influence in Gurkhas Finance from key promoters of Gurkha Development Bank as their stake has been diluted heavily,” said Sapkota. “One will not have more than 3-4 percent stake in the merged entity.”

The merged entity has deposits of Rs2 billion and equal amount of loans. Bad loans stand at Rs350 million.

• March 24, 2011: NRB declares Gurkha Dev Bank crisis-ridden
• January 3, 2013: NRB takes over the management
• May 28, 2015: Kathmandu Finance and Gurkha sign merger MoU
• March 16, 2016: NRB gives nod to the merger
• April 10, 2016: Joint operations as a finance company begins