Intellectual capital and financial performance of Indian banks

Purpose The purpose of this study is to investigate empirically the relationship between intellectual capital and financial performance of 65 Indian banks for a period of ten years from 1999 to 2008. Design/methodology/approach Reserve Bank of India's database and Annual reports, especially the profit and loss accounts and balance sheets of the banks for the relevant years have been used to obtain the data. Value added intellectual coefficient (VAIC™) method is applied for measuring the value based performance of banks. Return on assets (ROA) and return on equity (ROE) are used to measure the profitability and productivity of Indian banks, measured by assets turnover ratio (ATO). The intellectual capital (human capital and structural capital) and physical capital of selected banks have been analyzed and their impact on corporate performance has been measured using multiple regression technique. Findings The analysis indicates that the relationships between the performance of a bank's intellectual capital, and financial performance indicators, namely profitability and productivity, are varied. The study results suggest that banks’ intellectual capital is vital for their competitive advantage. Research limitations/implications The study uses only 65 leading Indian banks, including foreign banks operating in India. The value added intellectual coefficient (VAIC™), introduced by Pulic, is used in this study as a basic methodology to measure the IC performance of banks. Practical implications The VAIC™ method can be used as an important tool by the decision makers in the knowledge economy to integrate the intellectual capital in the decision making process. Originality/value This is one of the first empirical researches in India that examines the impact of IC on financial performance of the Indian banking sector in the long term.