Banks happen to be one of the largest Intellectual Capital (IC)-intensive sectors. Measurement and management of intellectual capital, therefore, become essential, as it reflects the true value of the firm. The main aim of this paper is to estimate and analyze the Value Added Intellectual Coefficient (VAIC) for measuring the value-based performance of the Indian private sector banks for a period of five years from 2002-2007. The source of the data is the annual report, especially the profit/loss account and balance sheet, of the concerned banks for the relevant years. The data was collected through the RBI online database on Indian economy. The methodology was finalized based on an extensive review of international literature on intellectual capital with specific reference to literature that reviews measurement techniques and tools of intellectual capital. This study applies the VAIC method (propounded by Pulic Ante in 2000) in order to analyze the data of Indian private sector banks for the five-year period. It analyzes the intellectual or Human Capital (HC) and Physical Capital (CA) of the Indian banking sector and discusses their impact on the banks' value-based performance. The significance of this study is that it approaches the performance measurement and efficiency of banks in India with a new perspective and dimension. The performance of the banks is closely linked to their valuation and also their future strategies related to mergers and acquisitions.

In the present economic scenario of growing knowledge and intangible intensive industry, the old system of measuring and reporting performance has become irrelevant, as it does not actually reflect the true value of the firms to the stakeholders. In this situation, there is a need either to develop a new system of performance measurement and reporting to replace the old system, or adapt the old system to accommodate the emerging requirements. Banks happen to be one such service sector which uses huge amount of Human Capital (HC) and customer capital for its survival. Thus, this study evaluates the business performance and efficiency of the Indian banking system over a period of five years, using Value Added Intellectual Coefficient (VAIC).

Any creation of the human mind can be called Intellectual Capital (IC) in general parlance. However, Edvinsson and Malone (1997) defined it as "Knowledge that can be converted into value." Karl-Erik Sveiby first proposed a classification for IC, dividing it into three broad areas of intangibles, viz., human capital, structural capital and customer capital (Sveiby, 1997)—the classification that was most accepted and which was later modified and extended by replacing customer capital with relational capital by Nick Bontis (Bontis, 1996).

Sustainable performance is key to achieve long-term relevance and success. Previously, the performance was driven mainly by tangible assets; however, in the present knowledge economy, it is the intellectual capital performance that drives efficiency and success. Transparency and disclosure are essential, particularly in a rapidly changing environment, and greater attention is being accorded to make banking systems more transparent. Intellectual capital has become the key resource to value creation. Mergers and Acquisitions (M&A) have become an important means for executing corporate strategies and reallocating resources in the global economy. The acquisition of knowledge and other intangible resources often underlies M&A strategies.

Bank Management Journal, Intellectual Capital Efficiency, Private Sector Banks, Human Capital, Mergers and Acquisitions, Indian economy, Reserve Bank of India, Capital Employed Efficiency, HDFC Bank, Ratnakar Bank, Non-Performing Assets, Consolidation Strategies.