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.

The investment metric on which Indian banks appear most eager to ape their Chinese peers is the price-to-truth ratio.

While investors know better than to take the People's Republic's published bad-loan ratio of 1.74 percent at face value, they have been reasonably certain that Indian lenders are more honest, following a 2015 review of asset quality by the central bank.

That belief received a major jolt on Friday. Yes Bank Ltd., the country's seventh-largest lender by market value, said in its annual report that in March 2016 -- yes, one year ago -- its nonperforming loans were $768 million according to a central bank review of asset quality, and not the $117 million reported in the company's audited accounts. Yes shares fell the most in 21 months.

Similar disclosures this month by ICICI Bank Ltd. and Axis Bank Ltd. have revealed a combined 57 percent increase in bad loans from what CEOs and boards at the trio have been telling investors.

Tell 'Em They're Dreaming
The stated nonperforming assets of several Indian banks vary greatly from what the actual number may be
Source: Company reports
Note: Annotations show divergence from RBI-assessed gross NPAs as percentage of reported values.

India's supposedly better-run, privately owned banks aren't suddenly seized by a desire to make amends for past amnesia. The red-faced admissions are occurring because the Reserve Bank of India on April 18 said that some lenders' published financial statements aren't depicting a "true and fair view" of their financial position. Starting with this earnings season, the RBI mandated that any hefty divergence in bad debt or loan-loss provisions between what its audit found and what the banks are telling investors must be revealed in notes to their accounts.

Now, the $3 billion of additional bad loans that ICICI, Axis and Yes have been forced to disclose don't add significantly to what's already a $180 billion heap of stressed banking assets, including both nonperforming and restructured loans. Besides, some of last year's problem loans may haven been written off or provided for; or they may have turned around and become standard assets.

Still, the delayed disclosures do call into question the 23 percent rally in Indian bank stocks in dollar terms so far this year. The MSCI India Financials Index, in which Yes Bank has the third-highest weighting, trades at a price-to-book ratio of 2.4 times, compared with 0.9 for a similar Chinese benchmark. On a price-to-truth basis, Indian banks look overvalued.

Expense Account
India finance stocks have long been valued more highly than their Chinese peers, but it's increasingly unclear whether the premium is justified
Source: Bloomberg
Note: Bloomberg estimates of price/book ratio, calculated by dividing the current price of the security by the consensus book value estimates provided by brokers.

The extent of overvaluation will become clearer when State Bank of India Ltd., the largest by assets, announces full-year results on Friday. Punjab National Bank Ltd. will report on Tuesday, and Bank of Baroda Ltd. on Thursday. Between them, the state-run trio has more than $700 billion in assets, compared with less than $300 billion at ICICI, Axis and Yes. 

If it turns out that the former too are sitting on more bad debt than the combined $33 billion they disclosed last year, investor sentiment could sour and the Indian banking system's hesitant return to equity markets would again hit a roadblock. With that, the growing expectation that the most knotty cases of botched corporate debt will get resolved in 90 days would look like more hype than hope.

The more stratospheric the price-to-truth multiple for Indian banks, the bumpier may be their return to terra firma.

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

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Andy Mukherjee in Singapore at

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Matthew Brooker at