Unlocking the Effects of Intellectual Capital: Exploring Income Diversification’s Moderating Role in Assessing Indian Banks’ Profit Efficiency

This study examines the nexus between profit efficiency, intellectual capital and income diversification in 25 Indian scheduled banks from 2007–2008 to 2021–2022. It employs Banker–Charnes–Cooper (BCC)–data envelopment analysis (DEA) to estimate profit efficiency, the modified value-added intellectual coefficient framework to determine the intellectual coefficient and a two-step generalized method of moments model to obtain robust and reliable estimation results. The estimation results show that intellectual capital and income diversification are complementary assets that can help banks to improve their profit efficiency. However, it is also found that the beneficial effect of intellectual capital becomes weaker or less impactful as income diversification increases in a highly competitive market. To improve bank performance, the study suggests that the bank’s policymakers, regulators and management authorities take necessary steps to augment the efficiency level of human capital and relational capital. Furthermore, a balanced approach to income diversification is recommended to mitigate potential adverse consequences through a proactive strategy formulation.