Why is the Price-to-Book Value (P/BV) ratio considered the most reliable and widely used valuation metric for Commercial Banks and NBFCs, whereas it is less relevant for Technology/IT Services firms?

[ A ]Banks are prohibited from publishing income statements under RBI rules, leaving only book value available.

[ B ]Banks hold predominantly monetary financial assets and liabilities that are regularly marked-to-market or closely reflect fair value; Technology firms rely on human capital and internally generated intangible assets that are omitted from balance sheets.[ CORRECT ]

[ C ]Technology firms hold massive physical steel factories that cannot be depreciated under IndAS.

[ D ]P/BV ratios are illegal for all non-banking companies in India under SEBI regulations.

Takeaway

Option B is correct: Banks hold predominantly monetary financial assets and liabilities that are regularly marked-to-market or closely reflect fair value; Technology firms rely on human capital and internally generated intangible assets that are omitted from balance sheets.

Derivation

P/BV (Market Price / Book Value per Share) is the benchmark multiple for financial institutions (Banks, NBFCs, Housing Finance Companies) because their balance sheets consist almost entirely of financial loans, investments, and deposits that are marked to market or carry explicit loan-loss provisions, making Book Value a direct proxy for economic net worth. In contrast, for asset-light Technology and Service firms, primary drivers of value (human capital, software architecture, brand equity, intellectual property) are internally generated and cannot be recognized on balance sheets, making reported book value negligible and unrepresentative. This tests sector-specific multiple selection. A common trap is using P/B for IT firms.

Why the others fail

A — Banks are prohibited from publishing income statements under RBI rules, leaving only book value available.

Banks publish detailed quarterly Profit and Loss statements under RBI and Banking Regulation Act formats.

C — Technology firms hold massive physical steel factories that cannot be depreciated under IndAS.

Technology firms are asset-light software/service providers, not heavy physical steel factory operators.

D — P/BV ratios are illegal for all non-banking companies in India under SEBI regulations.

P/BV is a standard financial ratio computed across all industries, though its analytical relevance varies by sector.