Technical efficiency, intellectual capital efficiency and bank performance in emerging markets: the case of India

What is it about?

This paper examines the impacts of technical efficiency and intellectual capital efficiency on bank performance in India after controlling other bank-specific, industry-specific and macroeconomic variables. We use secondary data on listed Indian commercial banks for the period 2005 – 2018. We use data envelopment analysis technique based Malmquist index to obtain technical efficiency and value added intellectual coefficient model for computing intellectual capital efficiency. System GMM model in a dynamic framework is used to estimate the parameters, which takes into consideration issues of endogeneity, heterogeneity and persistence of bank performance. Further, we use quantile regression model to examine whether the impacts of covariates are homogeneous at different locations of the conditional distribution of bank performance. We find positive impact of technical efficiency and negative influence of market concentration on bank performance. Our results support the efficient structure hypothesis. We observe positive influence of intellectual capital on bank performance, which indicates the relevance of intellectual resources in enhancing banks’ value. Further, our results of quantile regression indicate that the impacts of technical efficiency and intellectual capital efficiency are more pronounced at higher quantiles of the conditional distribution of bank performance.

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Why is it important?

The findings are useful for several policy implications for the regulatory authority, bank managers and investors to enhance the bank performance. First, there is a need to increase the technical efficiency of banks so that more number of banks can operate on the efficient production frontier. Second, as intellectual capital is the root of organizational success and it is a continuous cycle of three interrelated elements: knowledge acquisition, knowledge creation and knowledge dissemination, banks should acquire more experienced staff and provide adequate training opportunities to existing staffs to create more knowledge. Third, since IC is a crucial factor for value creation, bank should disclose more information on intellectual resources that it possesses in the annual report or other relevant report to provide positive signal to the market and to capitalise the financial benefits of IC disclosure. Fourth, banks should diversity their activities as it has a significant positive impact on bank performance. Finally, adequate steps should be taken to improve the asset quality of banks as non-performing assets are the crucial factors that dampen the profitability of banks individually and the overall economy in general.