Related Party Transactions and Non-performing Loans: A Developing Country Perspective

This study investigates the impact of related party transactions (RPTs) on non-performing loans (NPLs) in the banking sector of Bangladesh, using a panel dataset of 34 listed banks from the year 2016 to 2022. Concerns about insider lending, political influence, and weak governance motivated the researchers to study whether RPTs play any significant role in worsening loan quality. Pooled OLS with Fixed Effects and Random Effects are applied to assess the effects of total RPTs, related party loans and advances, and other RPTs on banks’ NPL ratios, alongside transaction numbers, types, and involved parties. Results show that total RPTs, related party loans, and other RPTs each have a significant positive association with NPLs, which indicate that concentrated insider dealings substantially increase credit risk. Conversely, a higher number of transactions, more transaction types, and broader party involvement are negatively associated with NPLs, suggesting that diversification reduces risk by preventing dominance of powerful insiders. Sub-sample analyses reveal that related party loans became especially problematic during the COVID-19 period. Governance indicators such as board size, and board independence, consistently reduce NPLs in the study period, whereas directors’ cross-holdings and bank size increase them. This study provides empirical evidence for developing-country banking systems and highlights the need for stricter RPT monitoring and stronger governance mechanisms in the banking sector of these countries. JEL Classification: G21, G32