Intellectual Capital and Its Impact on Financial Performance of Indian Banking Sector

Abstract

In the present era of the digital and knowledge-based economy, there has been a significant shift in the primary factor that drives organizational efficiency, performance, and value creation. In the past, physical assets were largely recognized as the primary determinant. With the emergence of knowledge-based economies and this digital era where production and value creation more depend on intangible assets (intellectual capital). Without a doubt, in the 21st century, the most effective method for nations to overcome the problems of globalization is by embracing Knowledge-Based assets preferably intellectual capital. Service enterprises, including banks, are classified as knowledge-intensive organizations, where the collection and growth of intellectual capital assets are essential aspects of bank administration. Intellectual capital, known as knowledge, has emerged as the primary driver of banks' wealth and the major force behind output. The stability of a country’s financial sector is essential to its sustainable growth and expansion. As a result of globalization and COVID-19, banks are confronted with new challenges because of the escalating complexity of emerging technologies, the advancement of communication and information techniques, and the rise in consumer expectations, as well as regulatory constraints. The dynamic transformations in the banking industry and the competitive landscape have compelled financial institutions to function as a sector that heavily relies on knowledge. This further led financial institutions to prioritize the assessment of the I.C to achieve their long-term goals. This study investigates the impact of the I.C on the financial performance (F.P) of 12 public and 17 private sector scheduled commercial banks in India. The Modified Value-added Intellectual coefficient (MVAIC) technique has been utilized to measure intellectual capital efficiency. The independent variables used to measure intellectual capital efficiency include human capital (H.C), structural capital (S.C), capital employed, and relational capital. The financial performance, namely profitability, has been assessed by utilizing return on assets (ROA), return on equity (ROE), return on capital employed (ROCE), and return on sales (ROS) as dependent variables. Two control variables, Leverage and Size, have also been considered. The sample for this study consists of 12 public and 17 private scheduled commercial banks, covering the period from 2010 to 2022. The study's data has been obtained from the financial annual reports of banks and the prowessIQ the database of the Centre for Monitoring Indian Economy (CMIE). v Once the relevant data from various variables has been collected and organized into panel data format then data is analyzed using suitable regression techniques i.e. fixed effect and cross-section random effect model and generalized method of moments (GMM). Based on the findings of this study, it was determined that banks in India generate significant value by investing in I.C resources. When considering the efficiencies resulting from I.C and its various components, it was found that human capital efficiency (HCE) was the most crucial resource compared to relational capital efficiencies (RCE), structural capital efficiencies (SCE), and capital employed efficiencies (CEE). This is logical because India is the most populous country in the world and has the youngest population. From an investment and business perspective, India offers great potential for growth, entrepreneurship, and innovation in several sectors. Thus, the outcome underscores the significance of making substantial investments in human resources, a concept supported by many business theories such as Resource-based theory (RB theory) and Human capital theory (HC theory). The study offers conclusions and suggests future research directions based on its findings. The findings will aid executives, government officials, and policymakers in measuring efficiency and understanding the crucial intellectual components that improve their efficacy. These discoveries will assist in formulating measures to promote and augment their intellectual capacity. Moreover, the extent of investments in the I.C has a direct impact on the growth efficiency and eventual profitability of both public and private scheduled commercial banks in India. This indicates that policymakers and regulators should focus on raising investments, strengthening management practices, and enhancing the monitoring of intellectual capital resources to achieve a robust, efficient, and profitable banking institution.