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Intellectual capital (IC) is beneficial to the improved performance of businesses, irrespective of their industry. The present study proposes to check if the use of IC can also help in improving the asset quality of banks. Thus, this study aims to examine the impact of IC and its components on non-performing assets (NPAs).

The study has been conducted with a sample of 30 Indian commercial banks and analysed over a time frame of 15 years (2004–2005 to 2018–2019). The modified value-added intellectual coefficient model has been used to measure the independent variables, IC, and its components. The dependent variable, NPA, has been represented by the net NPA ratio. Two-step system generalized methods of moments (SGMMs) have been applied for the regression analysis. Along with the short-term estimates provided by the SGMM approach, the long-term impact of explanatory variables on the dependent variables has also been seen.

The results of the study show that IC and its components are indeed helpful for the management of NPA, as they impact the problem loans negatively. Furthermore, the long-term benefits of IC in enhancing bank credit quality are more substantial.

The results from the present study can be used by bank management. The bank managers can draw inferences that the efficient application of IC can help them reduce their loan losses. Developing skills and knowledge of employees, maintaining close relations with stakeholders, significantly the customers, and putting more sophisticated processes and infrastructure to use can help banks to control their loan losses.

A major proportion of studies examining the role of intangible assets in various aspects of the banking sector focuses on the association between IC and the financial performance of banking entities. However, for banking institutions, apart from financial performance, improving credit quality is also imperative for staying afloat. Thus, to the best of the authors’ knowledge, the present study is one of the first to examine the relationship between knowledge-based assets (i.e. IC) and bank credit quality.

In recent years, the Indian banking sector is facing a major cause of concern in the form of Nonperforming Assets (NPA), and the priority sector lending (PSL) is generally recognized as the major factor contributing to it. Thus, the present study has been carried out with the objective of examining the relationship between priority sector lending and GDP growth. Thereafter, the role of PSL and certain other bank-specific, industry-specific and macroeconomic variables in determining NPA has been studied.

Taking a sample of 45 scheduled commercial banks, the study has been carried out for 14 years (2004–2018). Granger causality between PSL and GDP has been examined by applying the Dumitrescu-Hurlin test. For the purpose of investigating the impact of PSL and other determinants on NPA, both static and dynamic panel regression have been performed. Under the dynamic panel, system generalized methods of moments (S-GMM) approach has been followed.

The findings show that there exists a positive correlation and bidirectional causal relationship between PSL and GDP, which implies that PSL brings additional growth for the whole economy. In addition to it, PSL is found to be insignificant for the NPA ratio, and thus, it can be inferred that credit extended to government-specified sectors does not bring any major increase in the bad loan portfolio of banks.

The policymakers and bank management can take a cue from the findings of this study to decrease the exposure to loan nonrepayment issue. The priority sectors are in need of formal credit for their growth, and since the rising population of the country can find employment in these sectors, banks should meet their credit needs while securing their position with regard to the NPA problem.

The issue of NPA determinants, and in particular, the contribution of priority sector lending in it has not been much explored for Indian banking sector. Also, the present study adds to the literature by using the causality approach for examining the importance of directed credit schemes for economic growth.