Nothing is sacred as India's central bank cleans up the financial sector

By denying a full three-year term to Yes Bank Ltd. Chief Executive Officer Rana Kapoor, India’s banking regulator has sent stern messages to not one or two, but five constituencies.

The first wake-up call is for the CEOs themselves: To preserve their equity interest in a bank, they’re free to chase higher price-to-book multiples, but not by pumping up what I’ve called the price-to-truth ratio.

Kapoor earned the ire of the Reserve Bank of India by wrongly classifying loans he should have counted as nonperforming. Yes wasn’t the only bank to do this. RBI’s asset-quality reviews showed problems at Axis Bank Ltd. – and sure enough, the regulator refused to extend CEO Shikha Sharma’s reign, too. But while Sharma, who’ll leave at the end of the year, was a professional manager, Kapoor is a co-founder of Yes and a shareholder. The central bank wants him to step down after Jan. 31.

Graph That’s the RBI’s second message: The regulator won’t accept skin in the game as a proxy for good behavior. Since banks are licensed to create money out of thin air, the advice Spider-Man received from his uncle – “with great power comes great responsibility” – is the yardstick from now on.