Banking reform in India and China

Abstract This paper analyzes the important process about financial reform in the area of bank illiquidity in low‐income emerging markets. This process is taking place within the context of a debate as to whether or not governments should try to rehabilitate existing state‐owned banks or allow a new or parallel banking system to emerge in order to reduce non‐performing assets from state‐owned commercial banks. A comparison of institutional development in China and India suggests that new entry rather than the rehabilitation approach may work more favorably to reduce non‐performing assets. The paper offers an explanation as to why governments choose rehabilitation over new entry. Copyright © 2001 John Wiley & Sons, Ltd.