Related party lending and rural bank risk: Evidence during the Covid-19 period

Abstract

This study aims to investigate bank lending behaviors during the Covid-19 period and further to examine the effect of related party lending (RPL) on the rural bank risk. We posit there is significant change on the lending growth and related party lending proportion during this period. We utilize 730 rural banks in Indonesia using panel data approach from 2019 to 2022. Utilizing panel data estimations to test the impact of RPL on risk and to further investigate its interaction with the COVID-19 using system GMM, we document that RPL is negatively associated with rural bank risk proxied by loan loss provision as ex-ante credit risk and positively associated with Z-Score as bank default risk. Moreover, the COVID-19 weaken the relationship between related party lending and rural bank risk. These results provide new insight into understanding risk management implementation for minimizing these risks. We also adopt several proxies and a split sample analysis to check for the robustness. Finally, we seek for lesson learned from the crisis and propose some implication for bank and relevant authorities.