Exploring the effect of intellectual capital

on financial performance: a study of

Indian banks
Faizi Weqar, Ahmed Musa Khan and Syed Mohammed Imamul Haque

Abstract Faizi Weqar, Ahmed Musa

Purpose – The purpose of this paper is to inspect the effect of intellectual capital (IC) on the financial Khan and Syed
performance (FP) of Indian banks. Mohammed Imamul Haque
Design/methodology/approach – The study uses the data of 58 Indian banks, namely, 20 are all based at the
nationalised banks, 17 private Indian banks and 21 private foreign banks, for the period between 2009 Department of Commerce,
and 2018. A modified value-added intellectual coefficient methodology was used for measuring the Aligarh Muslim University,
efficiency of the IC. Aligarh, India.
Findings – The efficiency of IC significantly enhances the profitability and productivity of the Indian
banks. Overall, human capital is the most substantial component of IC in augmenting the profitability and
productivity of the Indian banking industry. Structural capital and physical capital are vital only for
improving profitability while the contribution of relational capital towards the banks’ FP is nominal. The
result also shows that amongst the three categories of Indian banks, private foreign banks are most
efficient in leveraging their IC.
Research limitations/implications – The study results are only restricted to Indian banks and the data
of only 58 banks are used for drawing the inferences.
Originality/value – The paper fills the void in the existing literature of IC and corporate FP by using the
data set of Indian banks divided into the public sector, private Indian and private foreign banks.
Keywords Profitability, Financial performance, Indian banks, Intellectual Capital, Productivity, MVAIC
Paper type Research paper

1. Introduction
In this knowledge era, more people execute mental work than physical work, which is very
challenging to quantify and measure. Land, labour and physical capital have been replaced
by knowledge, which is considered as the most critical factor for production (Drucker,
1988). Knowledge is also the most crucial factor in value creation and for a sustainable
competitive advantage (Drucker, 1993; Stewart, 1997).
It can also be assumed that some undeclared intangible asset causes the difference and
that about 80% of a corporation’s market worth remains unexplained in traditional financial
statements (Gu and Lev, 2001). This is one of the explanations for the argument that the
business cannot rely entirely only on the traditional indicator of financial performance
(hereafter FP) for the decision-making as it fails to capture such intangibles (Bontis, 2001;
Mehralian et al., 2012). So here comes the idea of intellectual capital (IC), which is the Received 3 December 2019
Revised 20 April 2020
excess of the market value of the business organisation over its book value. The rise of the Accepted 27 May 2020
new economy based on information and knowledge has promoted the prominence of IC.
The authors would like to thank
the anonymous reviewer for
The researchers across the globe, are of the view that IC if used effectively and efficiently, their valuable comments on the
results in enhancing the FP of the business organisation (Ramandeep and Narwal, 2016). IC manuscript.

DOI 10.1108/MBE-12-2019-0118 © Emerald Publishing Limited, ISSN 1368-3047 j MEASURING BUSINESS EXCELLENCE j
 can be used to improve the production level of the business organization, which helps in
driving up the profitability and market value, especially of the firms, which are driven by
knowledge (Stewart, 1997; Pulic, 1998). Many authors such as Mavridis (2004), El-bannany
(2008) and Mondal and Ghosh (2012) are of the view that the banking industry is one of the
knowledge-intensive industries as it depends more on IC than on the physical and financial
capital. The IC efficiency of the different types of banks is an essential area of research as
the academicians, policymakers and the researchers are eager to explore the significance
of IC in enhancing the efficiency of the banking sector (Singh et al., 2016).
Bank act as a stimulator for the economic development of the country by acting as a
financial intermediary between the different groups (Goh, 2005). Furthermore, soon after
adopting the policy of liberalisation, privatisation and globalisation in the year 1991, the
Indian banking industry has become one of the fastest budding industries of India.
However, it also opens a stiff rivalry with the new private sector banks, forcing them to
become more productive, profitable and efficient to survive.
Moreover, the Indian banking industry is one of the most robust industries of the world as
it was less influenced by the global economic crisis of 2008. During 2010–2011, the
profitability and productivity of the Indian banks are 1.1% and 15%, respectively, which
are amongst the highest performance indicator on the globe (Mohan, 2012). Bearing in
mind the prominence of IC and the progression and risk-absorbing capacity of the Indian
banks, this research aims to estimate the IC efficiency of scheduled commercial banks
(SCBs) and also to compare the three different kinds of Indian banks based on their IC
efficiency.
Currently, there are 20 public sector banks (PSBs), 22 private Indian banks and 46 private
foreign banks functioning in India (RBI, 2019). Banks in which the significant portions of
shares are held by the Indian Government are known as PSBs. Private Indian banks are the
banks where the majority stakes are held by the private entity. While the private foreign
banks are those banks whose headquarter is located in a foreign country but operates in
India as a private entity. The Indian commercial bank also includes 56 regional rural banks
(RRBs), 3 local area banks (LABs), 10 small finance banks and 7 Payments Bank (PBs).
However, in terms of deposits and loans and advances, the PSBs lead the Indian banking
industry. The percentage share of deposits and loans and advances are shown in Figure 1.
Therefore, to make the banks palmy days enduring and sustainable, it is imperative for the
Indian banks to invest in the development of their ICs. Thus, the data from the Indian banks
have been taken to examine the upshot of IC on its FP.
The motivation behind this study is the productive and developmental role played by the
banks in the Indian economy. As we all know that banks are the lifeblood of an economy. In
addition, as India is in the age of transformation from developing to a developed economy,
its banking and financial system should have a strong and endurable base. Recently, the
Indian Government has merged 10 state-owned banks into four groups just because of
strengthening the banking sector and the revive of the Indian economy, as it is struggling
from the mountains of debt (CNBC, 2019). In the year 2018–2019, 42 India’s SCBs
collectively write off a total of ` 2.12tn of bad loans (Standard, 2019). So, the Indian banking
industry needs support to overcome this and IC may act as a tool through which the banks
can achieve a competitive edge in the market. It will help in accomplishing the wealth
creation and value addition objectives of the bank. This study is different from the other
previous studies on the ground that, firstly, it categorises the private banks into two parts,
namely, private Indian banks and private foreign banks, which the previous study lacks.
Secondly, this paper employs the modified value-added (VA) intellectual coefficient
(MVAIC) methodology for measuring the IC efficiency, which has been used only in few
studies like the studies of Nazari and Herremans (2007), Ulum et al. (2014) and Tiwari and
Vidyarthi (2018).

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 Figure 1 Percentage share of various banks in deposits and loans and advances as on 31
March 2018

Deposits Loans & Advances

Local Area Regional

Regional
Banks Rural Local
Rural
5% Banks Small Area
Banks
Small 3% Finance Banks
3% Payment
Finance Private Banks 5%
Bank
Private Banks Foreign 0%
3%
Foreign 0% Banks
Banks 4%
4%

Private Private
Indian Indian
Banks Banks Public
23% Public 28% Sector
Sector
60%
62%

Source: Reserve Bank of India

The rest of the paper is arranged as follows: Section 2 is about the literature review and
hypotheses development. Section 3 deals with the data and sample size, regression
models and variables description. Section 4 shows the descriptive statistics and diagnostic
testing along with the panel data regression results and Section 5 deals with the conclusion
of the study followed by the limitations and direction for future research.

2. Literature review and hypotheses development

2.1 Intellectual capital and its taxonomy
IC or intangible capital is now acknowledged as a strategic asset in enhancing the FP of the
business organisation. As there is a consensus on the ability of IC to create the value to the
firm, many researchers and academicians had defined the notion and measurement of IC
according to their understanding (Stewart, 1997). Edvinsson and Sullivan (1996) define IC
as “Knowledge that can be converted into value”. Edvinsson and Malone (1997) are of the
view that IC is the collection of employees’ knowledge and skill gained by working over the
years and their relationship with the stakeholders (customers, creditors, government, etc.),
through which the business competes with their rivals in the market. Al-Ali (2003) explains
IC as “The knowledge, experience and brainpower of employees, as well as knowledge
resources stored in an organisation’s databases, systems, processes, culture and
philosophy”.
Academicians and researchers had categorised IC into two to four dimensions
(Dzenopoljac et al., 2017) but the classification of IC into three parts, deliver the clearest
taxonomy of IC (Sydler et al., 2014). The three broad classifications of IC include human
capital (HC), structural capital (SC) and relational capital (RC) (Bontis, 1998; Roos et al.,
1998; Weqar et al., 2020; Saint–Onge, 1996; Stewart, 1997).
HC is one of the core components of IC (Sardo et al., 2018), which encompasses the
knowledge and skill, experience and talent, attitude and education of the employees
working in the business organisation (Edvinsson and Malone, 1997; Ramandeep and

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 Narwal, 2016). It affects firm innovation and creativity (Hayton, 2005) but move from the
organisation along with the employees.
SC encompasses the non-physical assets created by the employees but owned by the
organisation. It remains within the organisation when employees left for their homes and
include organisational charts and processes, database and models, trademark, patent and
copyright (Ghosh and Mondal, 2009). It provides the supporting infrastructure for the
smooth functioning of HC (Bontis, 1998; Curado et al., 2011; Edvinsson, 1997) and also for
the establishment of a healthy relationship with the stakeholders (Sardo et al., 2018; Weqar
and Haque, 2020a).
RC includes all the resources through which the business builds, maintains and manages
its relationship with the various stakeholders for adding value to the firm. It includes the
relationship with the customers, suppliers, financial institutions and government and also
includes brand loyalty, reputation and market image (Sardo et al., 2018; Smriti and Das,
2018; Weqar and Haque, 2020b).
Quantifying and measuring IC accurately in monetary terms is a big task (Hamdan, 2018).
Also, the traditional financial statement failed to capture these intangibles and Indian
Accounting Standard 28 also do not compel the Indian firms to disclose their ICs (Smriti and
Das, 2018). The concept of IC and its reporting and disclosure are still immature in India
(Sriranga and Vijay, 2014; Smriti and Das, 2018). Pulic (1998) proposed a model, which has
been widely used by the researcher and academicians for measuring the efficiency of IC
and its component along with the financial capital, depending upon the value-added
concept (Iazzolino and Laise, 2013). This methodology is known as VA intellectual
coefficient (VAICTM). The VAICTM methodology is in line with the resource-based-view (RBV)
theory given by Wernerfelt (1984). RBV theory claims that to create value to the firm, both
tangible and intangible assets are indispensable.
Researchers across the world had used the VAICTM to explore the upshot of IC and its
component on the FP of the business organisation, as this method uses the easily
accessible secondary data for measuring the efficiency of IC and its component (Meles
et al., 2016). Nazari and Herremans (2007) have extended this VAIC model by adding RC
and named it as MVAIC. This paper employs the MVAIC methodology for measuring the
efficiency of the IC.

2.2 Intellectual capital literature review

A study on South-African listed firms by Firer and Williams (2003) revealed that HC was
significant but negatively linked to assets turnover (ATO) and market valuation (MB ratio).
While SC and physical capital were positively associated with return on assets (ROA) and
MB, respectively. Hamdan (2018) conducted a study on the firms of the Kingdom of Saudi
Arabia and the Kingdom of Bahrain and found that IC has a strong association with ROA,
but found no connection with Tobin’s Q. Maji and Goswami (2017) conducted a
comparative analysis on original and modified VAIC methodology on Indian firms and they
found that both original and modified VAIC and their components positively influence the
firm’s performance. Khalique et al. (2015) found that except for the HC, all the variables are
significant in enhancing the organisational performance of small and medium enterprises
(SMEs) in Pakistan.
Sardo et al. (2018) found that HC, SC and RC positively impact the FP of the Portuguese
SMEs hotels. The result also shows that HC and RC are the key elements; however, the
interaction between the dimensions of the IC enhances the hotel’s FP. In line with the results
of Sardo et al. (2018), Riahi–belkaoui (2003) also found that IC helps in augmenting the
performance of US multinational firms. Young et al. (2009) had explored the IC performance
of the eight Asian economies and found that both HC and physical capital are positive
liaised with the FP of the Asian commercial banks. Oppong et al. (2019) reveal that IC and

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physical capital have a positive association with employee’s productivity (EP) and ATO of
the Ghanaian insurance industry. On the other hand, HC and SC only enhance the EP of the
insurance industry of Ghana. Nadeem et al. (2017) report that the dimensions of VAIC (HC,
SC and physical capital) are positively linked with the FP of the BRICS economy. Cisneros
and Hernandez–perlines (2018) also found that constituents of the IC are also positively
associated with the organisational performance of the manufacturing firms of Mexico.
Another study was conducted by Khalique et al. (2018) on the knowledge-intensive firms of
Malaysia and found that all the components of IC are vital for enhancing the organisational
performance. Maditinos et al. (2011) revealed that only HC was significantly associated with the
FP of the Greek companies. Mohiuddin et al. (2008) failed to find any noteworthy association
between the IC and the FP of the Bangladeshi banking sector. Tan et al. (2007) report that IC is
positively associated with the FP of the publicly listed firms of Singapore. Ghosh and Maji
(2015) also found similar results regarding the Indian knowledge-based sector. The results
revealed that the VAIC positively influences ROA and MB ratio, whereas, amongst the
constituents of IC, HC and physical capital affect the firm’s performance positively.
Afroz et al. (2018) performed research on the textile sector of Bangladesh and they found
that HC remains insignificant while physical capital is significantly and positively associated
with all the three FP indicators. However, SC only enhances the profitability measure (ROA
and ROE) of the Bangladeshi textile sector. Ginesti et al. (2018) show that for building a
reputation of the Italian firms, HC is a significant player. The result also revealed that HC is
significantly negatively related to all the four FP indicators, whereas SC and capital
employed (CE) are only insignificant for ATO and ROE, respectively. Using the same model
of VAIC, Bontis et al. (2015) found that the hotel industry of Serbia is positively influenced by
the efficient use of physical and financial resources.
Chen et al. (2005) exposed that IC positively and considerably influence the business FP
and market value of the Taiwanese listed firms. Komnenic and Pokrajc ic
 (2012) show that
HC and physical capital are substantial in enhancing ROA, ROE and ATO while SC is only
significantly related to ROE in Multi-National Corporations (MNCs) of Serbia. Dzenopoljac
et al. (2017) scrutinised the effect of IC on the business performance of the Arab region and
found that HC considerably and positively impacts the market performance of the firm. The
result also shows that CE significantly enhances productivity and profitability, while SC
enhances the earnings of Arab firms.
The existing literature on the IC had empirically verified that IC boosts the firms’ profitability
(Chan, 2009a, 2009b; Ghosh and Mondal, 2009; Singh et al., 2016) and productivity
(Mondal and Ghosh, 2012; Ramandeep and Narwal, 2016), but this relationship needs to be
checked for different sectors of the country across the globe. However, only a few studies
had been conducted on the Indian banking sector showing mixed and varied results. This
tempted the researcher to re-examine the liaison between the IC and the FP of the Indian
banking industry, as banks are the lifeblood of an economy.

2.3 Hypotheses development

Nadeem et al. (2017) are of the view that IC helps in augmenting the FP of the firm
irrespective of its location and size. Hence, by following a large number of studies, the
authors predict the positive connexion amid the IC and the bank’s FP. Therefore, three
testable hypotheses have been formulated to inspect the influence of IC on the FP of the
Indian banks. Here, two FP indicators are used in contemporary research, namely, ROA
and ATO. ROA is an indicator of profitability, while ATO is used to measure the productivity
level of the organisation. These two indicators are used by the large number of researchers
across different countries, such as Kamath (2008) and Weqar and Haque (2020a, 2020b) in
India, Mehralian et al. (2012) in Iran, Chan (2009a, 2009b) in Hong Kong, Afroz et al. (2018)
in Bangladesh, Firer and Williams (2003) in South Africa, Ginesti et al. (2018) in Italy and

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 Komnenic and Pokrajc ic
 (2012) in Serbia. MVAIC constitutes four elements, namely, capital
employed efficiency (CEE), human capital efficiency (HCE), structural capital efficiency
(SCE) and relational capital efficiency (RCE).
Ozkan et al. (2016) show that HCE and SCE have a positive effect on the ROA of the Turkish
banks, while SCE and VAIC have an inconsequential effect on it. Similarly, IC of Indian software
and the pharmaceutical industry also enhances its FP (Ghosh and Mondal, 2009). Al-Musali and
Ku Ismail (2016) found that IC is significant for the performance of banks in all six GCC
countries, while the components of VAIC are significant in the majority of the GCC countries.
Asare et al. (2017) report that IC and all its dimensions (HCE, SCE and CEE) are positively
associated with ROA of the Ghanaian insurance industry. The findings of the prominent study by
Nimtrakoon (2015) on five ASEAN economies demonstrate that HCE, CEE and MVAIC have a
positive effect on ROA, whereas SCE and RCE remain insignificant towards it.
Thus, the authors propose the following research hypotheses:
H1. MVAIC is positively associated with ROA.
H1a. CEE is positively associated with ROA.
H1b. HCE is positively associated with ROA.
H1c. SCE is positively associated with ROA.
H1d. RCE is positively associated with ROA.
Komnenic and Pokrajc ic
 (2012) conducted a study on Serbia’s MNCs and found that HCE
and CEE shows a positive relationship with its ATO. A study on the Indian listed firms by
Smriti and Das (2018) revealed that HCE, SCE and VAIC enhance its ATO. Mondal and
Ghosh (2012) had explored the effect of IC on the FP of the Indian banks and found that
VAIC is positively liaised with ATO of the Indian banks. Similarly, Ramandeep and Narwal
(2016) report that VAIC shows a positive link with the ATO of the Indian manufacturing
industry. Hence, the authors propose the following set of hypotheses:
H2. MVAIC is positively associated with ATO.
H2a. CEE is positively associated with ATO.
H2b. HCE is positively associated with ATO.
H2c. SCE is positively associated with ATO.
H2d. RCE is positively associated with ATO.
In addition to the above hypotheses, one more hypothesis is also framed for exploring the
efficacy of IC on the PSBs, private Indian banks and private foreign banks. Private foreign
banks are supposed to perform better than the PSBs and private Indian banks. This
assumption is based on the estimation shown in Figure 2 that MVAIC is higher for foreign
banks than its other two counterparts in 9 out of 10 years of the study period. Also, the
foreign banks do their financial operation in India with the modern technology brought from
their home country as the majority of the foreign banks are from technologically advanced
economies. Therefore, the following hypothesis framed is as under:

H3. Private foreign banks are better than the PSBs and private Indian banks regarding
their IC efficiency.

3. Research methodology
3.1 Data and sample
The information needed for this research were extracted from the “prowess” database
manually, which is maintained by the “Centre for Monitoring Indian Economy”. It is the

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 Figure 2 Average MVAIC of PSBs, private Indian banks and private foreign banks

biggest and most wide-ranging database of India that provides time-series data of the
active Indian companies from 1989 onwards and updated continuously by its administrator.
Data of 58 banks were selected for the period between 2009 and 2018, out of which 20 are
PSBs, 17 are private Indian banks and 21 are private foreign banks. The reason behind
taking the period of study from 2009 onwards is just for seeing the unbiased effect of IC on
the bank’s FP.
The remaining banks (5 private Indian banks and 25 private foreign banks) are excluded
from the study as continuous data were not available for them. RRBs are eliminated for
the study, as their number is large (i.e. 56), but they contribute only 3% in the total
deposits and loans and advances of the Indian banking industry as exposed in Figure 1.
LABs though having a 5% contribution in the total deposits and loans and advances are
also excluded because it operates on a limited area of two to three contiguous districts.
Therefore, the sample of only public, private Indian and private foreign banks are
considered, as these three categories of Indian banks together constitute the significant
share in the Indian Economy by accepting the total deposit of ` 1,17,709bn (89% of total
deposits) and having the total fixed assets worth ` 1,408bn as on 31 March 2018 (RBI,
2018).

3.2 Regression models and variables description

To measure the influence of IC on the FP of the Indian banks, four regression models have
been framed. Models 1 and 3 scrutinises the rapport between MVAIC with ROA and ATO,
respectively. Similarly, Models 2 and 4 explore the connection between MAVIC’s
component with ROA and ATO, respectively. Models 1 and 3 is used to test the hypothesis
H1 and H2, respectively. Model 2 is used to test the hypotheses H1a–H1d while Model 4 is
used to test the hypotheses H2a–H2d.
Model 1:

ROAit ¼ a þ b 1 MVAICit þ b 2 Levit þ b 3 Sizeit þ « it

Model 2:
ROAit ¼ a þ b 1 CEEit þ b 2 HCEit þ b 3 SCEit þ b 6 RCEit þ b 4 Levit þ b 5 Sizeit þ « it

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Table 1 Variables measurement and references
.Variables
Dependent variables
Profitability
Productivity
Independent variables
Value added
Capital employed
Human capital
Structural capital
Relational capital
Capital employed efficiency
Human capital efficiency
Structural capital efficiency
Relational capital efficiency
Modified value added
intellectual coefficient
Control variables
Leverage
Size
Source: Authors’ compilation
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Model 3:
ATOit ¼ a þ b 1 MVAICit þ b 2 Levit þ b 3 Sizeit þ « it
Model 4:
ATOit ¼ a þ b 1 CEEit þ b 2 HCEit þ b 3 SCEit þ b 6 RCEit þ b 4 Levit þ b 5 Sizeit þ « it
where: ROA is an indicator of profitability calculating the ROA for the bank i and time t; ATO
is an indicator of productivity calculating the ATO for the bank i and time t; a is the constant;
b 1 to b 5 is the slope of the independent variable and control variable; « it is the error term;
MVAICit is the MVAIC for the bank i and time t; CEEit is the CEE of the bank i and time t;
HCEit is the HC Employed of the bank i and time t; SCEit is the SCE of the bank i and time t;
RCEit is the RC Employed of the bank i and time t; Levit is the leverage of the bank i and time
t; Sizeit is the size of the bank i and time t. All the variables, their measurement and
references are given in Table 1.
4. Results and discussion
4.1 Descriptive statistics and comparative analysis
The descriptive statistics of the full sample and the banks’ category-wise sample are shown
in Tables 2 and 3, respectively. The average profitability (ROA) level of Indian banks is less
than 1%, i.e. 0.94%, while amongst the three groups of banks used in the study, private
foreign banks show the highest profitability of 1.52%. Productivity (ATO) of the Indian banks
ranges from 0.03 to 0.33, with private Indian banks being the most productive category of
Indian banks.
The value of the MVAIC coefficient for the Indian banks ranges from 1.05 to 14.19 with an
average of 5.49. Private foreign banks are the most efficient group of Indian banks
Labels Measurement References
ROA It is the ratio of net income divided by total assets Hamdan (2018); Mohammed and Irbo
(2018); Ozkan et al. (2016)
ATO It is the ratio of net sales divided by total assets Ginesti et al. (2018), Oppong et al. (2019);
Smriti & Das (2018)
VA Sum of operating profit, employee cost, Pulic (1998, 2000, 2004)
depreciation (D) and amortisation (A)
CE CE
HC Total salary and wage cost
SC Subtracting HC from VA
RC Advertisement, marketing, selling and distribution Nazari and Herremans (2007)
expenses
CEE It is the ratio of VA divided by CE
HCE It is the ratio of VA divided by HC
SCE It is the ratio of SC divided by VA
RCE It is the ratio of RC divided by VA
MVAIC It is the sum of CEE, HCE, SCE and RCE
Lev It is the ratio of total outside liabilities divided by Ghosh and Mondal (2009), Tiwari and
total assets Vidyarthi (2018)
Size It is the log of total assets Afroz et al. (2018); Riahi–belkaoui (2003)
 Table 2 Descriptive statistics of the full sample
Variables Observation Mean SD Minimum Maximum

Dependent variables
ROA 580 0.0094 0.0126 0.0942 0.1045
ATO 580 0.0878 0.0279 0.0305 0.3366
Independent variables
CEE 580 0.1819 0.0869 0.0201 0.5025
HCE 580 4.4432 2.2382 1.0087 13.1579
SCE 580 0.7202 0.1464 0.0086 0.9448
RCE 580 0.0195 0.0767 0.00001 1.0729
MVAIC 580 5.4950 2.3217 1.0507 14.1925
Control variables
LTA 580 4.6360 0.8800 2.0420 6.5384
LEV 580 0.1740 0.1564 0.0138 0.8074
Source: Authors’ compilation

regarding the coefficient of MVAIC with the mean value of 6.67. The dependency on the
external debt as indicated by Leverage (LEV) shows that the private foreign banks are
highly dependent on the external debt with the mean value of 30.4% as compared to 9% in
PSBs and 11.2% in case of private Indian banks. Other descriptive are also presented in
Tables 2 and 3.
The average MVAIC of the Indian banking sector for the study period is 5.49, as shown in
Table 4. Out of the total of 58 banks used in the study, 21 banks have MVAIC above the
industry average, out of which, 62% are private foreign banks. Only four PSBs and four
private Indian banks achieve the industry average. While 37 banks are below the industry
average, i.e. 63% of the total banks used in the study are still endeavouring to attain the
average MVAIC of 5.49. In total, 80% of the PSBs and 76% of the private Indian banks lay in
the category of banks below the industry average.
Table 4 also indicates that only 2 out of 20 PSBs, namely, Indian bank and UCO bank are
amongst the top performers (i.e. amongst top 10 banks) in terms of MVAIC for the study
period 2009 to 2018. Rest 18 PSBs are the poor performer, possibly because of the large
and increasing amount of non-performing assets (NPAs) of the PSBs, as shown in Figure 3.
Also, the high cost of infrastructure, improper allocation of resources, large working force
and high social obligation may be the few reasons for the poor performance of the PSBs in
India.
On the other hand, amongst the top 10 banks, eight banks belong from the private foreign
banks, maybe because of the reason that these banks have a very low level of NPAs and
are highly technology-intensive. Another probable reason for this may be that most of them
have only a few branches and large corporate customers, resulting in the low expenditure
on HC, which increases the efficiency of HC (i.e. HCE), which directly inflated the MVAIC.
From the above, it can be concluded that a preponderant number of the Indian banks are
still combating to attain the industry average and of these, the bulk is the PSBs while private
foreign banks are better in terms of IC efficiency.

4.2 Diagnostic tests

Before running the panel data regression, the authors investigated the problem of
multicollinearity through the Variance Inflation Factor (VIF) and found that there is no problem
of multicollinearity in the data as all the values of VIF are below 10. Gujarati and Porter (2010)
are of the view that VIF above the value 10 causes the problem of multicollinearity. Then the
Breusch–Pagan/Cook–Weisberg test was applied for checking the Heteroskedasticity and
Breusch–Godfrey LM test was applied for checking the autocorrelation in residuals. The null

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 Table 3 Descriptive statistics on the basis of banks’ category
Variables Observation Mean SD Minimum Maximum

PSBs
Dependent variables
ROA 200 0.0032 0.0075 0.0254 0.0153
ATO 200 0.0835 0.0158 0.0640 0.2825
Independent variables
CEE 200 0.2174 0.0581 0.0952 0.4635
HCE 200 3.6292 1.0157 1.7315 7.6343
SCE 200 0.7032 0.0825 0.4225 0.8690
RCE 200 0.0054 0.0040 0.00013 0.0340
MVAIC 200 4.5552 1.1033 2.2567 8.6885
Control variables
LTA 200 5.3445 0.3417 4.6166 6.5384
LEV 200 0.0900 0.0288 0.0420 0.2060
Private Indian banks
Dependent variables
ROA 170 0.0096 0.0071 0.0199 0.0186
ATO 170 0.0943 0.0102 0.0678 0.1297
Independent variables
CEE 170 0.2263 0.0907 0.0687 0.5025
HCE 170 3.7647 1.2543 1.0791 8.8094
SCE 170 0.6899 0.1579 0.0733 0.8864
RCE 170 0.0160 0.0168 0.00091 0.0738
MVAIC 170 4.6970 1.3841 1.3146 9.9991
Control variables
LTA 170 4.7142 0.5908 3.3874 6.0270
LEV 170 0.1124 0.0854 0.0191 0.3546
Private foreign banks
Dependent variables
ROA 210 0.0152 0.0166 0.0942 0.1045
ATO 210 0.0871 0.0421 0.0305 0.3366
Independent variables
CEE 210 0.1123 0.0583 0.0201 0.3777
HCE 210 5.7678 2.9753 1.0087 13.1579
SCE 210 0.7610 0.1735 0.0086 0.9448
RCE 210 0.0357 0.1248 0.00001 1.0729
MVAIC 210 6.6768 3.0830 1.0507 14.1925
Control variables
LTA 210 3.8980 0.8481 2.0420 5.2155
LEV 210 0.3040 0.1853 0.0138 0.8074
Source: Authors’ compilation

hypothesis of the Breusch–Pagan/Cook–Weisberg is that there is no Heteroskedasticity in

residuals and the null of the Breusch–Godfrey LM test is that there is no autocorrelation in
residuals. Out of the total of four models used in the study, the null hypothesis of Models 1
and 3 gets rejected, and hence, to deal with Heteroskedasticity and autocorrelation, the
authors report the robust standard error for these two models only. However, for Models 2
and 4, only simple standard errors are shown.
Intending to choose the most suitable regression model, the authors have performed the F-
test (pooled ordinary least square (OLS) vs fixed effect (FE) model), Lagrange Multiplier
(LM) test (pooled OLS vs random effect (RE) model) and Hausman test (FE vs RE model).
The null hypothesis of the F-test is that there is no time-FE; the null of the LM test is that the
variance across entities is 0 and the null of the Hausman test is that both the fixed-effect
and random-effect model is consistent. In all the four models, the authors fail to accept the
null hypotheses of all the three tests. Therefore, the FE model is the most appropriate model
for gaining further insights regarding the linkage amid the IC and FP of the Indian banks.

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 Table 4 Calculated average value of MVAIC for individual banks for 10 years
Average Average
MVAIC MVAIC
Rank Banks name for 10 years Rank Banks name for 10 years

1 Bank of CeylonPFB 11.45 30 Federal Bank Ltd.PIB 5.00

2 JP Morgan Chase Bank, National AssociationPFB 10.48 31 Indusind Bank Ltd.PIB 4.95
3 Bank of Nova ScotiaPFB 10.27 32 Union Bank of IndiaPB 4.93
4 Krung Thai Bank Public Co. Ltd.PFB 10.15 33 Jammu and Kashmir Bank 4.91
Ltd.PIB
5 MUFG Bank Ltd.PFB 8.89 34 Corporation BankPB 4.88
6 Mizuho Bank Ltd.PFB 8.24 35 City Union Bank Ltd.PIB 4.86
7 Shinhan BankPFB 7.96 36 Andhra BankPB 4.83
8 Indian BankPB 7.75 37 Allahabad BankPB 4.83
9 Mashreqbank P S CPFB 6.99 38 State Bank of IndiaPB 4.80
10 Uco BankPB 6.92 39 DBS Bank Ltd.PFB 4.74
11 Citibank N APFB 6.89 40 Bank of IndiaPB 4.70
12 Credit Agricole Corporate & Invst. BankPFB 6.69 41 Bank of MaharashtraPB 4.46
13 Bank of America N APFB 6.58 42 South Indian Bank Ltd.PIB 4.30
14 Axis Bank Ltd.PIB 6.46 43 Barclays Bank PlcPFB 4.18
15 ICICI Bank Ltd.PIB 6.40 44 Vijaya Bank [Merged]PB 4.18
16 Bank Of BarodaPB 5.90 45 Canara BankPB 4.14
17 Syndicate BankPB 5.76 46 Indian Overseas BankPB 4.09
18 Hongkong & Shanghai Banking Corpn. Ltd.PFB 5.69 47 Kotak Mahindra Bank Ltd. 4.03
PIB
19 Standard Chartered Bank – India BranchesPFB 5.68 48 Karnataka Bank Ltd.PIB 3.97
20 HDFC Bank Ltd.PIB 5.64 49 Abu Dhabi Commercial Bank 3.93
Ltd.PFB
21 Nainital Bank Ltd.PIB 5.59 50 United Bank of IndiaPB 3.79
22 Oriental Bank of CommercePB 5.44 51 Lakshmi Vilas Bank Ltd.PIB 3.78
23 Deutsche Bank A GPFB 5.37 52 Dena Bank [Merged]PB 3.72
24 Punjab National BankPB 5.28 53 Punjab and Sind BankPB 3.61
25 Bank of Bahrain and Kuwait BscPFB 5.25 54 Central Bank of IndiaPB 3.54
26 BNP ParibasPFB 5.23 55 Societe GeneralePFB 3.51
27 Yes Bank Ltd.PIB 5.19 56 American Express Banking 3.11
Corpn.PFB
28 Tamilnad Mercantile Bank Ltd.PIB 5.09 57 Catholic Syrian Bank Ltd.PIB 2.41
29 Karur Vysya Bank Ltd.PIB 5.06 58 Dhanlaxmi Bank Ltd.PIB 1.77
Industry average: 5.49
No. of banks above industry average: 21
No. of banks below industry average: 37
Source: PFB shows private foreign banks, PIB shows private Indian banks and PB shows PSBs and Authors’ compilation

4.3 Panel regression results

Table 5 shows that in Models 1 and 3, MVAIC is substantially and positively associated with
the profitability (ROA) and productivity (ATO) of the Indian banks. It shows that IC plays a
substantial role in improving banks’ performance and in generating wealth and value for the
Indian banks. These results favour the findings of Mondal and Ghosh (2012), Ramandeep
and Narwal (2016) and Sydler et al. (2014), who proves empirically that IC act as a tool for
escalating the profitability and productivity. Therefore, the empirical results failed to reject
the hypotheses H1 and H2.
However, three out of four constituents of MVAIC, namely, CEE, HCE and SCE are
significantly and positively related with ROA in Model 2 and that support our hypotheses
H1a–H1c while it fails to support H1d. This shows that Indian banks can enhance their
profitability by investing in the procurement of the tangible assets (CEE), in improving the
knowledge and skill of the employees (HCE) and in developing the systems and databases
(SCE). The empirical outcomes of this research are in contrast with the findings of Tiwari
and Vidyarthi (2018), who only found that SCE enhances profitability while other variables

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 Figure 3 Gross NPAs of the Indian banks

Table 5 FE regression results of the full sample

Models ! independent Model 1 Model 2 Model 3 Model 4
variables ; ROA ROA ATO ATO
FE FE FE FE

Constant 0.0489 0.0349 0.1068 0.0989

[0.0109] (0.0064) [0.0152] (0.0105)
MVAIC 0.0026 0.0018
[0.0003] [0.0004]
CEE 0.0149 0.0103
(0.0063) (0.0103)
HCE 0.0013 0.0012
(0.0003) (0.0004)
SCE 0.0234 0.0108
(0.0043) (0.0071)
RCE 0.0224 0.0649
(0.0234) (0.0383)
Lev 0.0029 0.0057 0.0204 0.0187
[0.0052] (0.0041) [0.0067] (0.0067)
Size 0.0115 0.0112 0.0061 0.0058
[0.0023] (0.0013) [0.0033] (0.0021)
R2 0.3592 0.3974 0.1031 0.1123
F-stat 30.09 56.72 8.35 10.88
Notes:  ,  and  shows significant at 1%, 5% and 10% levels, respectively; standard error and
robust standard errors are shown in “()” and “[]”, respectively. FE shows fixed effect model, Authors’
compilation

remain insignificant. However, the result favours the findings of many studies such as
Chen et al. (2005), Ozkan et al. (2016) and Asare et al. (2017). Noticeably, the value of R2
increases from 35.9% to 39.7%. It indicates that the mechanisms of MVAIC are better in
explaining the profitability of the Indian banks than the MVAIC as a whole.
Such results are not seen regarding productivity, as only HCE is significantly and positively
associated with ATO of the Indian banks stating that employees of the Indian banks have
the potential to augment their productivity. Hence, the result favours our hypothesis H2b
that HCE is positively related to the productivity of the Indian banks while it failed to support

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the hypotheses H2a, H2c and H2d. Here also, the value of R2 increases from 10.3% to
11.2%, confirming that the constituents of MVAIC are better in explaining the productivity of
the Indian banks than the MVAIC.
To get a better understanding of the association amongst IC and banks’ FP, the authors
further conducted an in-depth analysis by dividing the sampled banks into the PSBs,
private Indian banks and private foreign banks. The regression outcomes based on the
banks’ category are shown in Table 6. Before going further, the authors have conducted the
F-test, LM test and the Hausman test for each category of the Indian banks for all the four
models to choose the best-suited model, namely, pooled OLS model vs fixed-effect model
vs, random-effect model. The null hypothesis of the entire three tests gets rejected, and
hence, the FE model is found to be the most appropriate except for the private Indian banks
in Models 3 and 4. Likewise, the pooled OLS model in Model 3 and the RE model in Model 4
is found to be the most appropriate models for doing the regression analysis.
In Models 1 and 3, the coefficient of MVAIC is positively associated with ROA and ATO of all
the three categories of the Indian banks except for the ATO of the private Indian banks. It
shows that except for the productivity of private Indian banks, IC acts as a crucial tool for
enhancing the FP of the Indian banks.
Models 2 and 4 explains the relationship between the IC components and the bank’s
profitability (ROA) and productivity (ATO). CEE has a significant positive relation only with
ROA and ATO of the private foreign banks stating that the tangible assets are the leading
player behind the performance of the private foreign banks.
HCE is significantly associated only with the profitability of the two categories of private
banks, namely, private Indian banks and private foreign banks while for enhancing the
banks’ productivity, HCE remains inconsequential. It shows that the private banks are using
their workforce efficiently in generating profit for their organisation while there is some
lacuna between the administrations of the PSBs with their employees, which needs to find
out in further studies. One plausible reason for this is that the employees of the PSBs, in a
majority of the cases, are over-burdened with their work, mainly because of the shortage of
employees.
The results relating to SCE show that it has a positive liaison with ROA and ATO of PSBs and
also with ROA of the private foreign banks. It demonstrates that PSBs are very efficient in
using their internal non-physical assets for improving the knowledge and skill of their
employees, which directly enhances the profitability and productivity of the PSBs. The fourth
variable of MVAIC, i.e. the coefficient of RC (RCE) remains an insignificant predictor in all
the three categories of the Indian banks.
Furthermore, the private foreign bank has the lowest NPAs as compared to the public
sector and private Indian banks (Figure 3) and its average MVAIC is also highest as
compared to the other two categories (Table 3). Moreover, the regression result also shows
that MVAIC significantly improves the profitability and productivity of private foreign banks
(Table 5). Therefore, the results support the hypothesis H3, which says that private foreign
banks are better than the PSBs and private foreign banks.

5. Conclusion
The inescapable prominence of IC on the FP of the business organisation has gained
momentum amongst the researchers and academicians all around the world. Now, it
becomes very difficult to repudiate that IC leads to the value creation of the firm (Berzkalne
and Zelgalve, 2014). Using the data of 58 Indian banks for the time period of 2009–2018,
this study aimed to explore the relationship between IC and its component and two
indicators of FP, i.e. profitability and productivity. The authors’ used the MVAIC

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j MEASURING BUSINESS EXCELLENCE j
Table 6 Regression results bank category wise
Model 1 ROA Model 2 ROA
Models ! Private Private Public Private Private
independent variables ; Public sector Indian foreign sector Indian foreign
FE FE FE FE FE FE

Constant 0.1457 [0.0143] 0.0177 (0.0054) 0.1421 [0.0283] 0.1204 [0.0189] 0.0159 (0.0065) 0.0180 (0.0089)
MVAIC 0.0026 [0.0005] 0.0021 (0.0003) 0.0020 [0.0006]
CEE 0.0039 [0.0129] 0.0032 (0.0063) 0.0421 (0.0154)
HCE 0.0017 [0.0008] 0.0016 (0.0007) 0.0008 (0.0003)
SCE 0.0647 [0.0160] 0.0059 (0.0054) 0.0334 (0.0068)
RCE 0.1718 [0.1453] 0.0399 (0.0270) 0.0314 (0.0319)
Lev 0.0217 [0.0303] 0.0011 (0.0073) 0.0196 [0.0076] 0.0030 [0.0351] 0.0014 (0.0081) 0.0063 (0.0053)
Size 0.0293 [0.0028] 0.0036 (0.0011) 0.0179 [0.0075] 0.0293 [0.0032] 0.0036 (0.0012) 0.0100 (0.0022)
R2 0.5283 0.2316 0.2314 0.5864 0.2432 0.4811
F-stat 34.98 15.07 5.17 29.18 7.87 28.28
Models ! Model 3 ATO Model 4 ATO
independent variables ; Public sector Private Indian
FE OLS FE FE RE FE
Constant 0.0556 [0.0193] 0.0954 (0.0068) 0.0343 (0.0091) 0.0418 [0.0367] 0.0762 [0.0109] 0.1252 (0.0154)
MVAIC 0.0011 [0.0003] 0.0004 (0.0006) 0.0025 (0.0002)
CEE 0.0125 [0.0256] 0.0241 [0.0127] 0.0806 (0.0266)
HCE 0.0013 [0.0011] 0.0010 [0.0016] 0.0005 (0.0006)
SCE 0.0306 [0.0098] 0.0139 [0.0091] 0.0173 (0.0117)
RCE 0.1446 [0.1111] 0.0511 [0.0419 0.0840 (0.0549)
Lev 0.0074 [0.0353] 0.0301 (0.0116) 0.0010 (0.0052) 0.0079 [0.0541] 0.0399 [0.0205] 0.0082 (0.0092)
Size 0.0041 [0.0035] 0.0016 (0.0017) 0.0092 (0.0023) 0.0039 [0.0055] 0.00006 [0.0025] 0.0179 (0.0038)
R2 0.0416 0.0499 0.3889 0.0739 0.0559 0.2898
F-stat 4.25 2.91 39.46 6.11 27.82 12.45
Notes:  ,  and  shows significant at 1%, 5% and 10% level, respectively; standard error and robust standard errors are shown in “()” and “[]”, respectively. FE, RE and OLS
represents Fixed effect, random effect and pooled ordinary linear regression, respectively. Authors’ compilation
methodology as a proxy measure of IC performance for verifying the hypotheses relating to
IC and banks’ FP.
The descriptive statistics show that the majority of the Indian banks are below this industry
average. The result also shows that private foreign banks have the highest coefficient of
MVAIC, while PSBs are at the bottom of this list. It shows that private foreign banks are
better than their other two counterparts in terms of their IC efficiency. Rising NPAs, poor
technological base, low investment in human resources maybe some of the probable
reasons for the poor performance of PSBs (Smriti and Das, 2018).
The panel data regression result undoubtedly shows that IC plays a crucial role in
augmenting the profitability and productivity of the Indian banks. The empirical outcomes
contribute to the existing literature by indicating that IC has a prominent role in the value-
creation of the Indian banks. This empirical result corroborates with the findings of Smriti
and Das (2018), who also proves that IC as a whole if used effectively and efficiently,
enhances the profitability and productivity of the business organisation. Amongst the
dimensions of MVAIC, HCE is the supreme contributor, as it enhances both profitability and
productivity of the Indian banks. Therefore, this outcome proposes that banks fascinated in
attaining the higher rate of profitability and productivity should escalate their devotion to
their HC assets by proper arrangement of training and developmental programs for
improving and strengthening the skills, abilities and knowledge of their employees. As, HC
is the main source of innovation, inspiration, creativity and origination, which ultimately helps
in attaining a competitive advantage to the firm (Sardo et al., 2018).
Indian banks can also enhance their profitability level by efficient and optimum utilisation of
their physical and SC as these two have a positive relation with ROA of the Indian banks. It
suggests that investment in physical and non-physical resources such as system,
database, software and customer relationship are significant for the banks’ profitability.
Both the physical capital and SC provides a base for HC to work effectively because a well-
trained and qualified employee cannot do anything without proper infrastructure, process,
procedures, database, routines, etc. (Mondal and Ghosh, 2012).
The results regarding the banks’ category show that IC has a positive connection with the
profitability and productivity of all the three groups of Indian banks except for the productivity of
the private Indian banks. Amongst the two performance indicators ROA and ATO, the
regression model indicates that ROA should be preferred over ATO for examining the influence
of IC on the FP of Indian banks as the value of R2 is somewhat greater in the models of ROA.
Though the empirical results of this research have established the positive association
amongst the FP of the Indian banks and its IC, however, till now the investment in the
development of IC by the Indian banks are very low as compared to the developing
economies. Therefore, it is the utmost need of the Indian banks to increase their investment
in developing their IC such as investing in modern technology, employee training
programmes, building a better customer-bank relationship by providing quality service,
reasonable and fair service charges. Hence, this study may act as a wake-up call and also
provide support to the managers and policymakers for examining the efficiency of the
banks’ IC and to invest in the development of IC on a priority basis.
Like any other study, this study also has a limitation, which opens up an opportunity for doing
future research. Firstly, this study is conducted on a single industry of a nation, so the
generalisation of results needs caution. Also, future research can be conducted by taking a
sample of banks from different Asian countries. Secondly, the analysis of this study is based
only on the sample of PSBs, private Indian banks and private foreign banks, so future
studies can be conducted by adding the sample of Cooperative Banks, RRBs, LABs and
PBs. Thirdly, this study employs the MVAIC methodology for measuring the efficiency of IC,
so future studies can be conducted by using the other methodology such as Tobin’s Q,
Balanced Scorecard and National IC Index for measuring the IC efficiency.

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Corresponding author
Faizi Weqar can be contacted at: weqaramu@gmail.com

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