Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

At least one Indian lender has decided its investors would rather have their worst fears confirmed than be left to imagine them. 

Axis Bank, the nation's fourth-largest by revenue, has come up with a corporate lending watch list, which it believes will be ``the key source of future stress."

All bank CEOs believe that sunshine is the best disinfectant, as long as the garbage was their predecessor's. But Shikha Sharma took the top job at Axis in June 2009, and if she's now freely admitting that the vast majority of the 226.3 billion rupees ($3.4 billion) of potentially dubious advances, about 13 percent of corporate assets, were racked up during her tenure, then she probably deserves a medal for honesty. Of course, it helps that Axis is not owned by the government. An equally bold mea culpa at a state-owned lender would likely lead to a full-blown criminal investigation against management.

Blame Game
Top 10 sectoral composition of Axis Bank's watch list
Source: Axis Bank

Axis has a simple motivation for disclosing more than its competitors: Shareholders seem to like it:

Sunshine as Disinfectant
Axis Bank's superior disclosure of its bad loan problem has contributed to its outperformance
Source: Bloomberg

While honesty may be both laudable and rare in a bank CEO, it's still not a substitute for sound lending judgment.

With Axis expecting about 60 percent of problem loans to turn turtle over the next eight quarters, shareholders are staring at a fresh $2 billion hole in two years. That's before adding slippages from retail and small business advances. And that's not all. According to Axis Bank's own numbers, only a quarter of its loans to highly leveraged corporates -- the main culprit behind India's bad-debt mess -- are on its watch list. Nothing has been said about the other loans to overextended borrowers.

Rising credit costs could make the current financial year a ``washout'' for Axis, according to brokerage Religare. The market's initial reaction to the watch list seems to support this pessimistic assessment. Despite reporting a 20 percent increase in its full-year operating profit before provisions on Tuesday, the bank's shares fell as much as 4.6 percent Wednesday morning in Mumbai, before recovering some of the lost ground.

Still, the disclosures are helpful. If nothing else, they remove any lingering concerns about Axis Bank's balance sheet. As analysts at Jefferies point out, there's no risk to capital.

Shareholders in some of India's more thinly capitalized state-run lenders can't have that certainty, at least not until they, too, can get a better peek into the Augean stables. Since that's unlikely, investors might be wise to use Axis Bank's disclosures to make judgments about other lenders, even if that means envisioning the worst.   

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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