In many countries, banks lend to firms controlled by the bank?s owners. We examine the benefits of related lending using a newly assembled dataset for Mexico. Related lending is prevalent (20% of commercial loans) and takes place on better terms than arm?s-length lending (annual interest rates are 4 percentage points lower). Related loans are 33% more likely to default and, when they do, have lower recovery rates (30% less) than unrelated ones. The evidence supports the view that rather than enhance information sharing, related lending is a manifestation of looting.
- The default rate on loans to related parties was 77.4 percent, compared to 32.1 percent for unrelated parties, while recovery rates were...
La Porta, Rafael, Florencio Lopez-de-Silanes and Guillermo Zamarripa. "Related Lending," Quarterly Journal of Economics, 2003, v118(1,Feb), 231-268. citation courtesy of