Journal of

Risk and Financial

Management

Article
Nexus between Intellectual Capital and Bank Productivity
in India
Ranjit Tiwari 1, * , Harishankar Vidyarthi 2 and Anand Kumar 3

1 Chandragupt Institute of Management Patna, Patna 800001, India

2 Institute of Public Enterprise, Hyderabad 500101, India
3 DCU Business School, Dublin City University, D09 Dublin, Ireland
* Correspondence: [email protected]

Abstract: This paper empirically investigates the influence of intellectual capital on changes in total
factor productivity of 36 BSE-listed banks in India from 2005 to 2019. This study employs a two-
stage analysis that begins by investigating changes in total factor productivity using the Malmquist
Productivity Index estimated through Data Envelopment Analysis, and then computes intellectual
capital and its sub-components within the Value Added Intellectual Coefficients model framework.
Then, using the System Generalised Method of Moments, we investigate the impact of intellectual
capital on changes in total factor productivity. According to our findings, productivity growth is
primarily driven by efficiency changes rather than technological changes. Furthermore, regression
results show that the intellectual capital index and its two sub-components, human capital and capital
employed, have a strong positive impact on bank productivity. This research could help bank senior
executives measure their productivity and intellectual capital, identify relevant intellectual capital
elements that contribute to productivity and develop future policies to encourage and improve their
intellectual potential. Furthermore, this is one of the few studies in the Indian context that examines
the nexus between intellectual capital and productivity using the Malmquist Productivity Index.

Keywords: Value Added Intellectual Coefficients; Malmquist Productivity Index; data envelopment
analysis; System Generalised Method of Moments; panel data; Indian banks

Citation: Tiwari, Ranjit, Harishankar

Vidyarthi, and Anand Kumar. 2023.
Nexus between Intellectual Capital 1. Introduction
and Bank Productivity in India. In recent times, due to the growing importance of knowledge and information at the
Journal of Risk and Financial workplace, intellectual capital has been acknowledged as a crucial strategic asset that may
Management 16: 54. https://doi.org/ be broadly described as the totality of the knowledge assets at a firm’s disposal with the
10.3390/jrfm16010054 ability to produce competitive advantage and potentially contribute to wealth creation
Academic Editor: Thanasis Stengos (Alipour 2012; Anghel 2008; Barney 1991; Subramaniam and Youndt 2005; Zack 1999).
Numerous research has been undertaken all over the world to support the concept of
Received: 8 November 2022 intellectual capital and its effect on corporate performance. However, it was noticed that
Revised: 22 December 2022
the majority of these studies have considered traditional performance ratios as a measure of
Accepted: 10 January 2023
a dependent variable to gauge the effect of intellectual capital on a company’s performance.
Published: 16 January 2023
Only a handful of studies have used productivity as a measure of a dependent variable
that measures output over time, which can be used as a benchmarking tool in examining a
firm’s progress.
Copyright: © 2023 by the authors.
Among the studies that have used productivity as a measure of performance, many
Licensee MDPI, Basel, Switzerland. of them have simply used asset turnover ratio (ATO) to measure productivity (Chu et al.
This article is an open access article 2011; Firer and Williams 2003; Ghosh and Mondal 2009; Kehelwalatenna 2016; Mehralian
distributed under the terms and et al. 2012; Nadeem et al. 2017; Scafarto et al. 2016; Smriti and Das 2018). This study is one
conditions of the Creative Commons of the few that have employed the Malmquist Productivity Index (MPI), one of the most
Attribution (CC BY) license (https:// widely used methods for determining how productivity changes over time (Alhassan and
creativecommons.org/licenses/by/ Asare 2016; Chen et al. 2014; Oppong et al. 2019), as a measure of productivity. Productivity
4.0/). is defined by data envelopment analysis (DEA) as the ratio of efficiency. Firms are able

J. Risk Financial Manag. 2023, 16, 54. https://doi.org/10.3390/jrfm16010054 https://www.mdpi.com/journal/jrfm

J. Risk Financial Manag. 2023, 16, 54 2 of 17

to evaluate and compare their respective competitive positions with rivals by computing
efficiency changes over a specific period of time. By demonstrating the effect of intellectual
capital on firm productivity using the MPI for the Indian Banking sector from 2005 to
2019, the current study seeks to extend the body of existing literature. The results of this
research will be useful for the banking industry as it attempts to quantify the nexus between
intellectual capital and firm productivity. Additionally, it may provide information on
intellectual capital elements that must be quickly taken into account in order to increase
firm productivity.
The remaining portions of this study are structured as follows. The earlier research
in this field is introduced in Section 2. The technique and data used in this investigation
are discussed in Section 3. The productivity-intellectual capital regression findings are
presented in Section 4. Finally, Section 5 concludes this research.

2. Review of Related Studies

2.1. Theoretical Background
The recourse-based view (RBV) of the firm emphasises the significance of productive
resources, both tangible and intangible assets, in shaping a firm’s success by building com-
petitive advantage (Amit and Schoemaker 1993; Martí 2007; Penrose 1980; Subramaniam
and Youndt 2005). The knowledge economy is the engine driving the new millennium,
with “ . . . greater dependence on knowledge, information and high skill levels, and the increasing
need for ready access to all of these by the business and public sectors . . . ”, (OECD 2005, p. 71).
Thus, the management and improvement of a firm’s knowledge resources are essential
to its ability to succeed (Cabrilo et al. 2009). As a result, one of the best methods to gain
an understanding of the dynamics of intangible resources and knowledge management is
through a firm’s RBV. Intellectual capital is the term used to refer to all of these intangible
resources (Edvinsson and Malone 1997; Stewart 1997). Intellectual capital broadly includes
human capital (HC), structural capital (SC), and relational capital (RC) (Alipour 2012; Bontis
2002; Edvinsson and Sullivan 1996; Lynn 1998; Stewart 1997; Tovstiga and Tulugurova
2007).

2.2. Relationship between Intellectual Capital and Firm Performance

Studies on the intellectual capital-performance relationship are initially focused on
developed economies, but in recent times, surges in studies from emerging economies have
been witnessed. The studies are primarily inclined towards the financial services sector,
followed by mixed industry and the pharmaceutical sector (Tiwari 2022).
The intellectual capital-performance relationship primarily provides evidence of a
strong positive connection (Anifowose et al. 2017; Clarke et al. 2011; Hamdan 2018; Joshi
et al. 2013; Kehelwalatenna 2016; Meles et al. 2016; Mondal and Ghosh 2012; Mavridis
2004; Oppong et al. 2019; Ozkan et al. 2017; Riahi-Belkaoui 2003; Singla 2020; Tovstiga and
Tulugurova 2007; Vishnu and Gupta 2014; Zeghal and Maaloul 2010). However, exceptions
to this were reported by Chu et al. (2011); Chang and Hsieh (2011); Firer and Williams
(2003); Gruian (2011); Iazzolino and Laise (2013); Maditinos et al. (2011); Ståhle et al.
(2011); and Williams (2001), providing evidence of a significant inverse or no association.
Although the likelihood of the hypothesised link is majorly favourable, certain researchers
have brought attention to the issue of the intellectual capital’s relatively little impact (low
coefficient) on business performance (Vidyarthi and Tiwari 2020; Tiwari and Vidyarthi
2018).
Further, it is noted that not all aspects of intellectual capital are equally crucial for
determining how well a corporation performs (Bontis 1998). Previous research has offered
empirical support for various combinations of components that are important to business
performance. The majority of studies carried out in developed economies (Bollen et al.
2005; Chen 2012; Díez et al. 2010; Joshi et al. 2013; Kehelwalatenna 2016; Maditinos et al.
2011; Meles et al. 2016; Santos-Rodrigues 2013; Sardo et al. 2018; Zeghal and Maaloul
2010) shows that HC is the most prevalent and important component of intellectual capital
J. Risk Financial Manag. 2023, 16, x FOR PEER REVIEW 3 of 18

2005; Chen 2012; Díez et al. 2010; Joshi et al. 2013; Kehelwalatenna 2016; Maditinos et al.
J. Risk Financial Manag. 2023, 16, 54 3 of 17
2011; Meles et al. 2016; Santos‐Rodrigues 2013; Sardo et al. 2018; Zeghal and Maaloul 2010)
shows that HC is the most prevalent and important component of intellectual capital that
influences corporate performance. However, research done in developing nations (Ali‐
that
pourinfluences
2012; Chencorporate
et al. 2005;performance. However,
Goh 2005; Hamdan research
2018; done in
Kamukama developing
et al. 2010; Nadeem nations et
(Alipour 2012; Chen et al. 2005; Goh 2005; Hamdan 2018; Kamukama
al. 2017; Poh et al. 2018; Tovstiga and Tulugurova 2007; Tiwari and Vidyarthi 2018; Vishnuet al. 2010; Nadeem
et
andal.Gupta
2017; Poh2014)etshow
al. 2018;
that Tovstiga
the mostand Tulugurova
important 2007; Tiwari
components and Vidyarthi
of intellectual capital2018;
that
Vishnu and Gupta 2014) show that the most important components
influence company performance are SC and HC. Additionally, the literature currently of intellectual capitalin
that influence
circulation company how,
emphasises performance
to variedare SC andone
degrees, HC.orAdditionally,
more aspectsthe of literature
intellectualcurrently
capital
in circulation
affect company emphasises
performance how,(Bontis
to varied degrees,
2002; Pablosone or more
2004; Wangaspects of intellectual
and Chang 2005). Mostcapital
re‐
affect
searchcompany performance
across developed (Bontis 2002;
and developing Pablos 2004;
economies Wangthat
has found andHC Chang
is the2005). Most
most preva‐
research across developed and developing economies has found that HC is the most
lent intellectual capital factor influencing company performance.
prevalent intellectual capital factor influencing company performance.
Although empirical evidence using productivity as a dependent variable is uncom‐
Although empirical evidence using productivity as a dependent variable is uncommon
mon when testing the intellectual capital‐performance nexus, the following are a few in‐
when testing the intellectual capital-performance nexus, the following are a few instances
stances of direct empirical evidence. Chen et al. (2014) explored the influence of intellec‐
of direct empirical evidence. Chen et al. (2014) explored the influence of intellectual capital
tual capital on productivity changes estimated using DEA‐based MPI and the MPI with
on productivity changes estimated using DEA-based MPI and the MPI with bootstrapping
bootstrapping approach for Malaysian general insurance firms over the period 2008–2011.
approach for Malaysian general insurance firms over the period 2008–2011. They observed
They observed that the intellectual capital index and its sub‐components have a favoura‐
that the intellectual capital index and its sub-components have a favourable and significant
ble and significant influence on productivity change. Alhassan and Asare (2016) examined
influence on productivity change. Alhassan and Asare (2016) examined the dynamics of
the dynamics of intellectual capital and bank productivity in Ghana from 2003 to 2011.
intellectual capital and bank productivity in Ghana from 2003 to 2011. During the study
During the study
period, they period,
discovered thatthey
the discovered
intellectual that theindex
capital intellectual
and its capital index and its two
two sub-components, HC
sub‐components, HC and capital employed (CE), had a positive
and capital employed (CE), had a positive impact on bank productivity. Oppong impact on bank produc‐
et al. (2019)
tivity. Oppong
examined et al. (2019)
the influence examined the
of intellectual influence
capital of intellectual
on DEA-based MPI. capital on DEA‐based
Productivity changes
MPI. Productivity changes for 33 insurance firms in Ghana
for 33 insurance firms in Ghana over the period 2008–2016 were measured. Their over the period 2008–2016
results
were measured. Their results indicated that intellectual capital and
indicated that intellectual capital and its two subcomponents, HC and CE, have a significantits two subcompo‐
nents, HC
positive and CE,on
influence have a significant
insurance positive
companies’ influence on
productivity insurance
change. Thus,companies’
within theproduc‐
limited
empirical evidence, we see evidence of a positive relationship with no studiesof
tivity change. Thus, within the limited empirical evidence, we see evidence a positive
focusing on
relationship
India, which withlimitsno studies
our focusing
knowledge on intellectual
of the India, whichcapital-productivity
limits our knowledge of the
nexus intel‐
in one of
lectual
the capital‐productivity
world’s nexus in one
fastest-growing emerging of the world’s
economies (OECDfastest‐growing
2022). The current emerging econo‐
study aims to
miesto(OECD
add 2022).literature
the existing The current study aims
by providing to add to
evidence of the
the existing literature
intellectual by providing
capital-productivity
evidence
nexus of the intellectual capital‐productivity nexus in India.
in India.

3. Methodology and Data

This section is divided into six subsections. The first subsection briefly discusses the
DEA used to estimate MPI, namely total factor productivity (TFPCH) and its components
technical efficiency change (TEFFCH) and technological change (TECHCH) of the sample
banks.
banks. The
The second
secondsub-section
sub‐sectionillustrates
illustratesthe
thetheoretical
theoreticalapproach
approach forfor
measuring
measuring intellectual
intellec‐
capital
tual capital using the Value Added Intellectual Coefficient (VAIC) and ModifiedAdded
using the Value Added Intellectual Coefficient (VAIC) and Modified Value Value
Intellectual Coefficient
Added Intellectual (MVAIC)(MVAIC)
Coefficient approaches. The thirdThe
approaches. sub-section explains the
third sub‐section choicethe
explains of
control
choice ofvariables used in the
control variables used model.
in theThe fourth
model. Thesubsection briefly discusses
fourth subsection hypothesis
briefly discusses hy‐
development. The fifthThe
pothesis development. sub-section describesdescribes
fifth sub‐section the regression models used
the regression to estimate
models the
used to esti‐
impact of intellectual capital and its components on computed TFPCH and
mate the impact of intellectual capital and its components on computed TFPCH and its its components
(TEFFCH
components and(TEFFCH
TECHCH)and for TECHCH)
Indian banks forfrom 2005
Indian to 2019.
banks The
from finaltosub-section
2005 discusses
2019. The final sub‐
the study’s data sources and duration. In summary the research framework
section discusses the study’s data sources and duration. In summary the research is as frame‐
below
(Figure
work is 1).
as below (Figure 1).

Regression model
Estimating Total Factor
Estimating Intellectual capital [Total factor prodctivity =
productivity using Malmquist
using VAIC framework f(Intellectual capital + Control
Productivity Index
variables)]

Figure 1. Research framework.Source: Author’s own compilation.

Figure 1. Research framework. Source: Author’s own compilation.
J. Risk Financial Manag. 2023, 16, 54 4 of 17

3.1. Dependent Variable: Estimating Malmquist Productivity Index (MPI)

Following Jaffry et al. (2007),this study employs a non-parametric DEA-based output—
oriented MPI technique to compute the productivity of Indian banks over the period 2005–
2019. Malmquist (1953) pioneered MPI, which was later expanded by Fare et al. (1994). It
compares productivity changes over two time periods due to the catching-up effect (changes
in technical efficiency) and the frontier-shift effect (changes in technology). The catching-up
effect measures how efficiently banks convert inputs into outputs, whereas the frontier-shift
effect measures technological progress between two time periods. Furthermore, MPI does
not require input and output prices for productivity estimation because it only requires
quantity data. Moreover, if the MPI values are higher than one, it represents productivity
growth over time; lower than one represents deterioration in productivity growth, and
equal to one represents stagnation in bank productivity growth.
Following Berger and Humphrey (1997), the study uses the intermediation strategy
suggested by Sealey and Lindley (1977) for estimating bank-wise MPI namely TFPCH,
TEFFCH and TECHCH. The study uses four inputs, namely interest expenditures, non-
interest expenditures, personnel expenditures, and deposits, for generating three outputs,
namely interest income, non-interest income, and loans and advances.
1
dto (yt , xt ) dso (yt , xt ) dso (ys , xs ) 2

TFPCH index = mo (ys , xs , yt , xt ) = s ×
do (ys , xs ) dto (yt , xt ) dto (ys , xs )

dto (yt , xt )
TEFFCH =
dso (ys , xs )
1
ds (yt , xt ) dso (ys , xs )

2
TECHCH = ot ×
do (yt , xt ) dto (ys , xs )
Note: TFPCH index = TEFFCH x TECHCH.
Here, dto (ys , xs ) represents the observational output distance function at time ‘s’ from
the production frontier at time ‘t’.

3.2. Independent Variable: Measuring Intellectual Capital

In line with previous studies (Chen et al. 2014; Lu et al. 2014; Tiwari and Vidyarthi
2018; Wang 2013; Young et al. 2009; Zeghal and Maaloul 2010), this study employs the VAIC
framework proposed by Pulic (1998, 2000) to calculate intellectual capital sub-components
such as the human capital coefficient (VAHC), structural capital coefficient (SCVA), and
capital employed coefficient (VACE). Further, the study estimates a bank’s relational capital
coefficient (RCVA) following Bontis (1998) and Bontis et al. (2000), to get MVAIC suggested
by Wang and Chang (2005), and Vishnu and Gupta (2014). These indicators are calculated
in the following manner:
VA = OUTPUT − INPUT (1)
VAHC = VA/HC (2)
SCVA = SC/VA = (VA-HC)/VA (3)
VACE = VA/CE (4)
VAIC = VAHC + SCVA + VACE (5)
RCVA = RC/VA (6)
MVAIC = VAHC + SCVA + VACE + RCVA (7)
Here, Output represents total income consisting of interest and non-interest income
for the bank. Input represents gross operational costs excluding personnel expenditures
(which are treated as investments but not costs). The terms, VA represents the value
J. Risk Financial Manag. 2023, 16, 54 5 of 17

added, HC represents total employee compensation, RC represents selling and distribution

expenditure, and CE refers to the book value of net assets employed.

3.3. Control Variables

In keeping with prior studies, the current study includes several control variables
(Adjusted Herfindahl–Hirshman Index, Size, Leverage, Inflation, and GDP growth) in
the estimation methods to control for unknown effects that may influence changes in the
productivity of banks (Table 1).

Table 1. Control variables and references.

Variable Definition Purpose Expected Sign (+/-) Reference

Adjusted
Herfindahl–Hirshman
Index. Luhnen (2009); Cummins and Xie’s
The AHHI is used to
AHHI = 1 − (2013); Alhassan and Biekpe (2016);
evaluate the impact of
AHHI [(Non-interest +/- Ilyas and Rajasekaran (2019);
revenue diversification on
income/Total income)2 Sharma and Sharma (2015); Nartey
bank productivity.
+ (Net interest et al. (2019)
income/Total
income)2 ]
Grigorian and Manole (2002);
Size is used to assess
Williams and Nguyen (2005); Akin
Natural logarithm of whether or not economies
Size +/- et al. (2009); Sufian (2011); Sharma
the bank’s total asset of scale exist in the Indian
and Sharma (2015); Nartey et al.
banking industry.
(2019)
The term leverage is used
to describe the impact of Alhassan and Asare (2016); Akbar
Leverage Ratio of debt to equity +/-
leverage on bank et al. (2016); Nartey et al. (2019)
productivity.
This study includes
inflation to analyse the
impact of price level Perry (1992); Sufian (2011); Sharma
Inflation Consumer price index +/-
changes on the efficiency and Sharma (2015)
and productivity growth of
the Indian banking sector.
GDP growth has been
included in this study to
measure the effect of
Fiordelisi and Molyneux (2010);
GDP GDP growth rate volatile external conditions +
Sharma and Sharma (2015)
on the efficiency and
productivity of Indian
banks.
Source: Author’s own compilation.

3.4. Hypotheses Development

As per the RBV theory of the firm superior corporate profitability is linked to resources,
both tangible and intangible, owned by firms (Barney 1991; Galbreath 2005; Wernerfelt
1984). Additionally, in contemporary, fiercely competitive economic contexts, a firm’s
intangible resources rather than its physical resources serve as the primary driver of
value generation (Ahangar 2011; Hsu and Chang 2011). Therefore, to sustain growth in
a knowledge-intensive industry like banking, it will have to focus more on its intangible
resources, i.e., intellectual capital. Consequently, intellectual capital can be viewed as a
crucial resource and strategic asset for enhancing corporate profitability and gaining an
advantage over competitors (Wernerfelt 1984). Thus, intellectual capital has emerged as a
major factor in improving corporate success. Despite the opposing findings of Andriessen
J. Risk Financial Manag. 2023, 16, 54 6 of 17

(2004), Chowdhury et al. (2019), Ståhle et al. (2011), and Yalama and Coskun (2007), the
majority of research finds significant proof to reinforce the change in corporate profitability
attributed to VAIC/MVAIC (Cabrita and Vaz 2006; Mondal and Ghosh 2012; Saengchan
2007; Xu and Li 2022; Tiwari 2022).
Things become clearer when we explore the factors included in VAIC/MVAIC, i.e., HC,
SC, RC, and CE. HC refers to the sum-total of an employee’s knowledge, abilities, creativity,
experiential, and sage judgement. It is essential for a company because it can propel the
enterprise to success. Since workers carry these distinguishing traits with them when they
leave the organisation, attracting and keeping good employees is essential. SC includes
unique systems and procedures, as well as copyrights, patents, trademarks, databases, and
know-how that an organisation develops over time and supports the productivity of its
human capital (Bontis 2002). RC is the company’s capacity to sustain friendly connections
with its stakeholders, which may result in new clients, continuous raw material supply,
and simplified government processes, among other things (Anam et al. 2012; Montequín
et al. 2006; Tiwari and Vidyarthi 2018; Xu and Li 2022). CE is a tangible resource required
for a company’s survival. Furthermore, it is argued that the presence of capital employed is
required for the HC to contribute to value generation (Goh 2005; El-Bannany 2008; Tiwari
and Vidyarthi 2018). Factor exploration gives us a comprehensive understanding of why
and how intellectual capital can influence performance. In this study, we anticipate that
VAIC/MVAIC and its members, represented as VAHC, SCVA, RCVA, and VACE will have
a favourable impact on the productivity index-based measures of bank performance.
Thus, we presume a positive association between changes in intellectual capital re-
sources and changes in productivity. We investigate the effects of VAIC / MVAIC and their
individual components on TFPCH and its components, which are used as a performance
measure in this study. Thus, the following hypotheses are proposed:

Hypothesis 1. VAIC has a significant positive impact on TFPCHa/TEFFCHb/TECHCHc.

Hypothesis 2. VAHCa/SCVAb/VACEc has a significant positive impact on TFPCH.

Hypothesis 3. VAHCa/SCVAb/VACEc has a significant positive impact on TEFFCH.

Hypothesis 4. VAHCa/SCVAb/VACEc has a significant positive impact on TECHCH.

Hypothesis 5. MVAIC has a significant positive impact on TFPCHa/TEFFCHb/TECHCHc.

Hypothesis 6. VAHCa/SCVAb/RCVAc/VACEd has a significant positive impact on TFPCH.

Hypothesis 7. VAHCa/SCVAb/RCVAc/VACEd has a significant positive impact on TEFFCH.

Hypothesis 8. VAHCa/SCVAb/RCVAc/VACEd has a significant positive impact on TECHCH.

3.5. Regression Models

The direct impact of intellectual capital on bank productivity is estimated through a
two-step System Generalized Method of Moments (Sys-GMM) regression because of its
ability to overcome endogeneity, heteroscedasticity, and reverse causality (Nadeem et al.
2017; Smriti and Das 2018). We perform two specification tests (Arellano–Bond test and
Sargan test) to confirm the precision of the Sys-GMM estimators: for zero autocorrelation
in first-differenced residuals and over-identifying constraints. The following regression
models are used to estimate the effect of VAIC/MVAIC and its subcomponents (Equations
(1)–(4)).
J. Risk Financial Manag. 2023, 16, 54 7 of 17

Model 1:

Yit = α0 +δ Yit−1 + β 1 VAICit + β 2 AHHIit + β 3 Leverageit + β 4 lnSizeit + β 5 GDP Growthit +

β 6 Inflatonit +ε it

Model 2:

Yit = α0 +δ Yit−1 + β 1 MVAICit + β 2 AHHIit + β 3 Leverageit + β 4 lnSizeit + β 5 GDP Growthit

+ β 6 Inflatonit +ε it

Model 3:

Yit = α0 +δ Yit−1 + β 1 VACEit + β 2 VAHCit + β 3 SCVAit + β 4 AHHIit + β 5 Leverageit + β 6 lnSizeit +

β 7 GDP Growthit + β 8 Inflatonit +ε it

Model 4:

Yit = α0 +δ Yit−1 + β 1 VACEit + β 2 VAHCit + β 3 SCVAit + β 4 RCVAit + β 5 AHHIit + β 6 Leverageit +

β 7 lnSizeit + β 8 GDP Growthit + β 9 Inflatonit +ε it

Here, Y represents TFPCH, TEFFCH, and TECHCH respectively. VAIC and MVAIC repre-
sent the intellectual capital index. VACE, VAHC, SCVA, and RCVA represent components
of the intellectual capital index. AHHI, Leverage, Size, GDP Growth, and Inflation rep-
resent the adjusted Herfindahl–Hirshman index, total borrowings/total assets, natural
logarithm of total assets, annual GDP growth rate, and change in the consumer price index.
Further, ε it denotes the error term for bank i at time t.

3.6. Data
We collect the relevant banking data from the Centre for Monitoring Indian Economy
(CMIE)’s PROWESS database and macroeconomic parameters from the World Development
Indicator 2019 for the period 2005 to 2019. The summary statistics of the variables used in
this research are presented in Appendix A as Table A1 (descriptive statistics and correlation
matrix).

4. Empirical Results and Discussions

4.1. Empirical Results
We begin our empirical analysis by estimating DEA-based TFPCH and its mutually
exclusive and exhaustive components, which are technical efficiency change (TEFFCH) and
technological change (TECHCH) for all 36 listed banks present at the beginning as well as
ending year (2005 and 2019). It excludes banks that entered or exited the market during the
research period. A productivity index value higher than 1 indicates progress, while a value
less than 1 indicates regress.
The average (geometric mean) TFPCH score for sample banks is 0.982, which indicates
that most banks have shown a decrease in productivity during the study period. Further,
productivity change regressed over the study period due to a consistent decline in both
TEFFCH and TECHCH (with a mean of 0.996 and 0.986, respectively) (Table 2).
J. Risk Financial Manag. 2023, 16, 54 8 of 17

Table 2. MPI summary of annual means, during 2005–2019.

Technical Efficiency Technical Change Change in Total Factor

Year
Change (TEFFCH) (TECHCH) Productivity (TFPCH)
2005 1 1 1
2006 1.011 0.949 0.96
2007 1.006 0.991 0.997
2008 1.004 0.984 0.988
2009 0.998 0.995 0.993
2010 0.998 1.013 1.011
2011 1.001 0.981 0.982
2012 0.999 1.001 1
2013 0.997 0.989 0.986
2014 0.988 0.989 0.977
2015 1.003 0.992 0.995
2016 0.975 0.964 0.94
2017 1.014 0.977 0.991
2018 0.945 0.987 0.933
2019 1.007 0.991 0.998
Geometric Mean 0.996 0.986 0.982
Source: Author’s own estimation derived from DEAP 2.1 Software. Note: The year 2005 is taken as the reference
year for productivity change in the Indian banking sector, and therefore, it takes an initial score of 1 for the MPI
and its sub-components.

Furthermore, the TEFFCH change is greater than one in seven sub-periods and less
than one in the remaining eight. Similarly, the TECHCH is greater than one in only two
sub-periods and less than one in the remaining sub-periods. Turning to the individual
bank results, we found that only 6 out of 36 banks have TFPCH scores that are higher
than one, indicating that a relatively lesser number of banks have experienced a rise in
productivity during the study period. Further exploring the sources of inefficiency revealed
both technological and efficiency regress (Table 3).
All regression results in Tables 4 and 5 were computed using the Sys-GMM. The choice
of a dynamic model is justified by the significant lagged dependent variables. Furthermore,
the AR (2) and Sargan test p-values are insignificant, indicating that the models are free
of diagnostic errors. Further, to address the issue of instrument proliferation, the study
restricts the instruments of lagged dependent variables.
Table 4 confirms that lagged endogenous variables are significant and negative, with
parameter values ranging from −0.0199 to −0.283, thus confirming the presence of a high
degree of persistence in bank productivity and its sub-components. Table 4 (Model-1)
displays the impact of VAIC on TFPCH and its sub-components (TEFFCH and TECHCH)
as estimated using the Sys-GMM approach. Empirical results confirmed that VAIC has
a favourable and significant impact on TFPCH and its sub-components (TEFFCH and
TECHCH) at a 1 percent significance level. The VAIC influence is highest in the case of
TFPCH (0.0042), followed by TEFFCH (0.0030) and TECHCH (0.0009) respectively. Thus,
we infer that higher investment in intellectual capital leads to higher growth in productivity.
Thus, empirical results confirm the findings of Alhassan and Asare (2016); Chen et al.
(2014); Oppong et al. (2019) and Zakery and Afrazeh (2015) that intellectual capital has a
significant and favourable impact on a firm’s productivity.
J. Risk Financial Manag. 2023, 16, 54 9 of 17

Table 3. MPI summary of bank-specific means, during 2005–2019.

Technical Efficiency Technical Change Change in Total Factor

Bank
Change (TEFFCH) (TECHCH) Productivity (TFPCH)
Allahabad Bank 0.985 1.007 0.992
Andhra Bank 0.986 0.995 0.98
Axis Bank 1.002 1.003 1.005
Bank of Baroda 0.999 0.991 0.99
Bank of India 0.986 1 0.986
Bank of Maharashtra 0.988 0.991 0.979
Canara Bank 0.997 0.99 0.988
Catholic Syrian Bank 0.996 0.967 0.964
Central Bank of India 0.987 0.988 0.975
City Union Bank 1 0.993 0.993
Corporation Bank 0.992 0.968 0.96
D C B Bank 1.011 0.983 0.994
Dhanlaxmi Bank 1.005 0.987 0.992
Federal Bank 1.006 1.004 1.01
H D F C Bank 1 0.989 0.989
I C I C I Bank 1 0.986 0.986
I D B I Bank 0.986 0.919 0.906
Indian Bank 0.997 0.988 0.985
Indian Overseas Bank 0.984 0.993 0.977
Indusind Bank 1 1.006 1.006
Karnataka Bank 1.002 0.978 0.981
KarurVysya Bank 0.992 0.996 0.988
Kotak Mahindra Bank 1 0.984 0.984
Lakshmi Vilas Bank 0.995 0.982 0.977
Oriental Bank of Commerce 1 1.002 1.002
Punjab & Sind Bank 0.995 0.979 0.974
Punjab National Bank 0.99 0.989 0.979
R B L Bank 1.009 0.992 1.001
South Indian Bank 1.008 0.999 1.007
State Bank of India 0.995 0.992 0.987
Syndicate Bank 0.992 0.995 0.987
Tamilnadu Mercantile Bank 0.997 0.967 0.965
Uco Bank 0.978 0.998 0.977
Union Bank of India 0.991 0.995 0.986
United Bank of India 1 0.963 0.963
Yes Bank 1 0.94 0.94
Source: Author’s own estimation derived from DEAP 2.1 Software.

Further, revenue diversification is having an inverse and significant influence on all

productivity indicators except TEFFCH, thus suggesting that diversifying revenue may
adversely impact the productivity change and technology change components (Luhnen
2009). Other control variables, such as leverage, are having a favourable and significant
impact on TFPCH and TECHCH at the 1% significance level. Though bank size is inversely
related to TFPCH and its subcomponents, this relationship is only significant for TECHCH.
Similarly, the economic growth rate is negatively related to TFPCH and TECHCH but
positively related to TEFFCH. Further, inflation is having a positive impact on TFPCH and
its sub-components. Sign expectations of control variables are consistent with prior studies
except for the GDP growth rate that provides negative relation with TFPCH and TECHCH,
probably because during the study period, India experienced a relatively volatile growth in
GDP (Sharma and Sharma 2015).
J. Risk Financial Manag. 2023, 16, 54 10 of 17

Table 4. Productivity—Intellectual Capital Nexus (VAIC™).

TFPCH TEFFCH TECHCH

Variables
Model 1 Model 3 Model 1 Model 3 Model 1 Model 3
Lagged DV −0.0907 * −0.0998 * −0.282 * −0.283 * −0.0199 −0.0304 ***
AHHI −0.0924 * −0.0848 * −0.0181 −0.0128 −0.0961 * −0.115 *
VAIC 0.00429 * 0.00304 * 0.000919 *
VAHC −0.00159 0.00503 * −0.00770 *
SCVA 0.00469 * 0.00302 * 0.00126 *
VACE −0.0183 ** −0.0018 −0.00134
Leverage 0.0999 * 0.0689 ** −0.0227 −0.0176 0.146 * 0.128 *
Size −0.00044 −0.00402 *** −0.00033 2.26E−05 −0.00380 ** −0.00533 **
Inflation 0.291 * 0.304 * 0.0908 * 0.0922 * 0.214 * 0.211 *
GDP −0.120 *** −0.0923 0.0999 ** 0.0919 ** −0.269 * −0.269 *
Constant 0.986 * 1.087 * 1.286 * 1.274 * 0.947 * 1.018 *
AR(1) −4.3787 * −4.4001 * −3.0836 * −3.087 * −3.926 * −3.9004 *
AR(2) 0.62441 0.486 −0.5393 −0.5798 0.01734 −0.1827
Sargan 0.4585 0.3405 0.2787 0.2752 0.3611 0.4259
Source: Author’s own estimation. Note: *, **, and *** denote the statistical significance at 1, 5 and 10 percent levels,
respectively.

Table 5. Productivity—Intellectual Capital Nexus (MVAIC™).

TFPCH TEFFCH TECHCH

Variables
Model 2 Model 4 Model 2 Model 4 Model 2 Model 4
Lagged DV −0.0902 * −0.100 * −0.282 * −0.286 * −0.0198 −0.0257
AHHI −0.0946 * −0.0819 ** −0.0186 −0.00278 −0.0964 * −0.124 *
MVAIC 0.00445 * 0.00317 * 0.000961 *
VAHC −0.00153 0.00534 * −0.00797 *
SCVA 0.00474 ** 0.00216 ** 0.00453 *
VACE −0.0178 ** −0.00066 −0.00341
RCVA 0.00312 −0.0217 0.0772 *
Leverage 0.102 * 0.0671 ** −0.0222 −0.0184 0.147 * 0.139 *
Size −0.00031 −0.00378 −0.00023 −0.00046 −0.00379 ** −0.00487 ***
Inflation 0.292 * 0.305 * 0.0911 * 0.0934 * 0.214 * 0.195 *
GDP −0.120 *** −0.0873 0.0995 ** 0.104 ** −0.268 * −0.269 *
Constant 0.981 * 1.084 * 1.284 * 1.281 * 0.947 * 0.997 *
AR(1) −4.3793 * −4.4059 * −3.0854 * −3.0751 * −3.9255 −3.879 *
AR(2) 0.62338 0.4763 −0.541 −0.602 0.0167 −0.2941
Sargan 0.46 0.3355 0.2763 0.2807 0.3618 0.4378
Source: Author’s own estimation. Note: *, **, and *** denote the statistical significance at 1, 5 and 10 percent levels,
respectively.

We expanded the examination by using sub-components of intellectual capital rather

than aggregate intellectual capital (VAIC) as per Model 3. It was found that SCVA has
a significant and positive influence on the TFPCH and its sub-components. VAHC has
a positive impact on TEFFCH while having a negative impact on TECHCH. VACE has
a significant inverse impact only in the case of TFPCH. Further, all the control variables,
including AHHI, leverage, size, GDP growth, and inflation, were found to have a similar
impact on TFPCH and its sub-components with an exception to Size and GDP in the case
of TFPCH.
Furthermore, we extended the analysis by employing MVAIC and its sub-components,
an extension of the VAIC framework as per Model (2) and Model (4) respectively (Table 5).
We observed that MVAIC and its sub-components have similar impacts on TFPCH and its
sub-components. The RCVA, which was an addition to the VAIC framework to compute
MVAIC, was found to be significant only in the case of TECHCH. Moreover, control
variables have a similar impact on TFPCH and its components with the exception of GDP
in the case of TFPCH.
J. Risk Financial Manag. 2023, 16, 54 11 of 17

4.2. Discussions
Based on the above findings it can be inferred that intellectual capital has a significant
impact on productivity. Thus, we accept H1a, H1b and H1c in the case of VAIC and H5a,
H5b and H5c in the case of MVAIC. Our findings are consistent with that of Alhassan and
Asare (2016) and Oppong et al. (2019). Further, components of intellectual capital were also
found to have a significant impact on productivity. Thus, while using the VAIC framework
we accept H2b and H2c in the case of TFPCH, H3a and H3b in the case of TEFFCH, and
H4a and H4b in the case of TECHCH, meaning that structural capital and capital employed
influences TFPCH, whereas human capital and structural capital influences TEFFCH and
TECHCH. Furthermore, while using the MVAIC framework we accept H6b and H6d in the
case of TFPCH, H7a and H7b in the case of TEFFCH, and H8a, H8b and H8c in the case of
TECHCH, implying that structural capital and capital employed influence TFPCH, whereas
human capital and structural capital influence both TEFFCH and TECHCH. Another factor
influencing TECHCH was relational capital (See, Table 6 for Hypotheses testing results).

Table 6. Hypotheses testing results.

Hypothesis Details Accept

VAIC has a significant positive impact on
Hypothesis 1 H1a, H1b and H1c
TFPCHa/TEFFCHb/TECHCHc.
VAHCa/SCVAb/VACEc has a significant positive
Hypothesis 2 H2b and H2c
impact on TFPCH.
VAHCa/SCVAb/VACEc has a significant positive
Hypothesis 3 H3a and H3b
impact on TEFFCH.
VAHCa/SCVAb/VACEc has a significant positive
Hypothesis 4 H4a and H4b
impact on TECHCH.
MVAIC has a significant positive impact on
Hypothesis 5 H5a, H5b, and H5c
TFPCHa/TEFFCHb/TECHCHc.
VAHCa/SCVAb/RCVAc/VACEd has a significant
Hypothesis 6 H6b and H6d
positive impact on TFPCH.
VAHCa/SCVAb/RCVAc/VACEd has a significant
Hypothesis 7 H7a and H7b
positive impact on TEFFCH.
VAHCa/SCVAb/RCVAc/VACEd has a significant
Hypothesis 8 H7a, H7b and H7c
positive impact on TECHCH.
Source: Author’s own compilation.

In summary, it can be concluded that the intellectual-capital index influences TFPCH

and its components. Further, structural capital and capital employed influence TFPCH,
whereas human capital and structural capital commonly influences TEFFCH and TECHCH.
Furthermore, relational capital was only significant in the case of TECHCH.

4.3. Practical Implication of the Study

Several practical implications of this study are presented below based on the above
findings. First and foremost, decision-makers will be able to estimate intellectual capital
using VAIC/MVAIC framework, which will help them understand banks’ intellectual-
capital status. Second, it is evident from the findings of the study that intellectual capital i.e.,
both VAIC and MVAIC have a significant positive influence on bank productivity and its
components with low coefficients. Therefore, by improving the overall intellectual capital
within an organization, banks can increase their output. Thus, this study will motivate the
decision-makers in framing policies favourable to improving intellectual capital within an
organization for the purpose of enhancing productivity. Third, component-wise analyses
will empower decision-makers in identifying the important drivers of intellectual capital
that drive the overall productivity of banking firms. In the present study, TFPCH is in-
fluenced by structural capital and capital employed, whereas TEFFCH and TECHCH are
commonly influenced by human capital and structural capital, implying that productivity
is influenced by select intellectual capital factors. This information will help in optimum
J. Risk Financial Manag. 2023, 16, 54 12 of 17

resource allocation in the short term to maximize intellectual capital within an organization,
which will ultimately get reflected through increased productivity. However, as the intellec-
tual capital index has a significant positive impact on productivity, decision-makers needed
to focus on all the intellectual-capital components in the long term. Finally, the findings of
this research from India, one of the fastest-growing developing economies (OECD 2022),
have essential connotations for developing nations because the study confirms the findings
of Oppong et al. (2019) that intellectual capital is an essential driver of firm productivity,
which can foreseeably contribute to economic expansion. Thus, developing nations may
frame conducive policies for enhancing investments into intellectual capital to achieve a
higher intellectual-capital coefficient to attain higher productivity.

5. Conclusions
This research investigates the effect of intellectual capital on changes in total factor
productivity for 36 Indian listed banks from 2005 to 2019. For computing changes in total
factor productivity and intellectual capital, we use a DEA-based MPI approach and a
VAIC/MVAIC model framework, respectively. According to our findings, intellectual
capital has a strong favourable impact on total factor productivity and its sub-components
in the Indian banking sector (Alhassan and Asare 2016; Chen et al. 2014; Oppong et al.
2019; Zakery and Afrazeh 2015). Further, structural capital and capital employed influence
total factor productivity, whereas human capital and structural capital commonly influences
technical efficiency change and technological change. Furthermore, relational capital was only
significant in the case of technological change. Thus, our findings imply that corporate
investments in intellectual capital could improve the productivity of Indian banking firms.

Limitations and Future Scope

One of the potential limitations of this study is that it provides a case study of India
that is limited to a single industry; thus, the generalisation of findings should be done
with caution. However, as this study is among the first few studies in India, we encourage
researchers to conduct similar studies in India, considering other sectors, as all the sectors
in today’s dynamic environment are heavily dependent on intellectual capital. Further,
we encourage country and sector-specific studies from other developing economies to
understand the country and sector-specific characteristics of the relationship. Furthermore,
while intellectual capital measurement has been guided by past studies, for future studies,
the latitude of intellectual capital can be enhanced by including an innovation capital
coefficient that can be measured using research and development expenses.

Author Contributions: Conceptualization, R.T., H.V. and A.K.; methodology, H.V. and R.T.; software,
H.V.; data curation, R.T. and H.V.; writing—original draft preparation, R.T. and A.K.; writing—review
and editing, A.K. and H.V.; visualization, R.T. All authors have read and agreed to the published
version of the manuscript.
Funding: This research received no external funding.
Data Availability Statement: The data presented in this study are available on request from the
corresponding author.
Acknowledgments: We sincerely appreciate all valuable comments and suggestions from the anony-
mous reviewers and the Academic Editor, which helped us to improve the quality of the manuscript.
Conflicts of Interest: The authors declare no conflict of interest.
J. Risk Financial Manag. 2023, 16, 54 13 of 17

Appendix A
Table A1. Descriptive statistics and Correlation matrix.

Details Mean Std. Dev. TFPCH TEFFCH TECHCH VAIC MVAIC VAHC SCVA VACE RCVA AHHI Leverage Size Inflation
TFPCH 0.9859 0.0716
TEFFCH 0.9972 0.0455 0.6265 **
TECHCH 0.9886 0.0562 0.7841 ** 0.0092
VAIC 0.2399 0.0673 0.1012 ** 0.1353 ** 0.0265
MVAIC 2.8487 3.0522 0.0989 ** 0.1340 ** 0.0244 0.9996 **
VAHC 2.887 2.9658 −0.0207 0.0519 −0.0683 0.5100 ** 0.5273 **
SCVA 2.148 1.2533 0.1299 ** 0.1324 ** 0.0666 0.8941 ** 0.8845 ** 0.0763
VACE 0.4179 2.6231 −0.0263 0.0037 −0.0367 0.3012 ** 0.3111 ** 0.4588 ** 0.0455
RCVA 0.2827 0.2251 −0.1268 ** −0.1274 ** −0.0687 −0.7120 ** −0.6912 ** 0.0582 −0.8587 ** 0.0285
AHHI 0.0383 0.1232 −0.0209 −0.0035 −0.0244 0.0728 0.0803 0.0882 ** 0.0369 0.0664 0.1295 **
Leverage 0.932 0.0541 0.0019 −0.0261 0.0231 −0.1198 ** −0.1253 ** −0.2310 ** −0.0227 −0.0743 −0.0486 −0.0395
Size 13.5186 1.4938 −0.038 −0.0148 −0.0363 −0.0335 −0.0344 0.0383 −0.0532 −0.0479 0.0017 0.0669 0.2010 **
Inflation 0.07 0.0279 0.1025 ** 0.057 0.0832 0.0328 0.0324 −0.021 0.0513 −0.0357 −0.0331 0.0777 −0.0729 0.0232
GDP 0.0705 0.0141 −0.0407 0.0301 −0.0754 −0.0099 −0.0089 0.0306 −0.0238 −0.0263 0.0294 −0.0097 0.0048 −0.0352 −0.2613 **
Source: Author’s own estimation. Notes: ** significant at 5% level.
J. Risk Financial Manag. 2023, 16, 54 14 of 17

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