Banking reform in India and China

This paper analyzes the important process about financial reform in the are a of bank illiquidity in low-income emerging markets. This process is takin g place within the context of a debate as to whether or not governments sho uld try to rehabilitate existing state-owned banks or allow a new or parall el banking system to emerge in order to reduce non-performing assets from s tate-owned commercial banks. A comparison of institutional development in C hina and India suggests that new entry rather than the rehabilitation appro ach may work more favorably to reduce non-performing assets. The paper offe rs an explanation as to why governments choose rehabilitation over new entr y. Copyright (C) 2001 John Wiley & Sons, Ltd.