CHAPTER II REVIEW OF RELATED LITERATURE AND STUDIES

This chapter will present literature reviews related to the assessment of the effectiveness of PDIC claims process as perceived by the troubled depositors of closed Rural Bank of San Jose and its effect on their trust in banks. Literature and studies presented in this chapter contains information, concepts, theories and findings that are contributory and fitting for the selection and development of the theoretical framework of the study.

PDIC (Philippine Deposit Insurance Corporation)

The organization that held the deposit insurance coverage in the country is the Philippine Deposit Insurance Corporation. PDIC was established in 1963, to help promote a stable and sound banking system and foster public confidence in the banking system. Through deposit insurance, PDIC is able to protect less-financially sophisticated depositors from loss of their deposits in case of bank failures and serves as a safety net to the banking system conducive to financial stability. The Communications and Stakeholder Relations Group of the Philippine Deposit Insurance Corporation (PDIC) is tasked to help increase public awareness on the importance of saving as well as financial literacy. This is in support of PDICs mandate to provide depositor protection and help maintain stability in the banking system. It is rooted on the belief that informed depositors are empowered depositors. The Corporation continuously seeks channels to reach out to the public with information on their rights and responsibilities as depositors. As a deposit insurer, PDIC collects semi-annual assessments from member-banks (the current rate is 1/5 of 1% of the total deposits) and it may terminate as well as reinstate the insured status of banks under certain condition. As co-regulator of the banking system, PDIC conducts offsite examination of banks, it may issue cease and desist orders against banks following unsafe and unsound banking practices, undertake failure resolution activities in coordination with the Bangko Sentral ng Pilipinas (BSP); and provide financial assistance to distressed banks.

PDIC serves as a security measure to whether or not one has to invest on a particular bank. As alleged by its charter, the deposit liabilities of any bank or banking institution, which is engaged in the business of receiving deposits, or which thereafter may engage in the business of receiving deposits, shall be insured with the Corporation. This means any depositor who saves his money in a banking institution is assured that his deposit is insured by PDIC. (http://www.pdic.gov.ph/index.php?nid1=4&nid2=2&nid3=1) The PDIC maintains a deposit insurance fund that is supported by premium assessments paid by member banks. Funding is also provided by the Philippine government through paid-in capital. The PDIC is authorized to borrow from the Philippine central bank and, if necessary, from certain private sector banks. With the approval of the country's president, the PDIC may issue bonds or other obligations to pay insured depositor claims. A distressed bank may request financial assistance from the PDIC. If the bank meets certain conditionsfor example, if the continued operation of the bank is needed to provide adequate banking service in the community or to maintain financial stability in the economy the PDIC may provide assistance. When rehabilitation is unlikely to resolve the bank's problems, however, the Monetary Board of the central bank may order the bank closed. The PDIC automatically becomes the receiver and begins the payout process. Because a bank deposit secrecy law is in effect, the PDIC can obtain deposit records only upon closure or takeover of the bank, in which case the PDIC is notified and immediately takes charge of the bank's assets and liabilities. The PDIC's Claims Processing Department handles claims for payment of insured deposits. Staff in this department checks for compliance with documentary requirements, validates supporting documents, and approves or denies claims. This department also determines the funding requirements for a payout and settles claims by either check or cash. The PDIC follows a self-imposed deadline of making payouts within nine days of a bank takeover. Before making payouts, the PDIC conducts a presettlement examination in which outstanding and insured deposits are identified by bank documents and records. Next, the PDIC establishes the validity of deposit accounts and tracks the inflow of funds. Then, it generates a Register of Estimated Insured Deposits, which becomes the basis for the claims process to begin. Depositors file a claim, and a claims agent verifies that they are the rightful owners by

requiring basic documents, such as a passbook or bank statement and valid customer identification, according to established guidelines. The PDIC pays insured deposits after the validity of the claim is established. A claim is normally processed and paid on the same day it is filed, except in cases where the bank's records are inaccurate or inadequate, or the claimant is unable to provide the required documentation. The PDIC completes initial servicing or payout of claims at the bank within two to three weeks after the closing/takeover. Thereafter, acceptance and servicing of claims is continued at the PDIC office. Depositors have two years from the bank closing date to file their claims. (http://www.fdic.gov/bank/analytical/quarterly/2010_vol4_2/claims.html) The term deposit means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account, or issued in accordance with Bangko Sentral rules and regulations and other applicable laws, together with such other obligations of a bank, which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the bank: Provided, That any obligation of a bank which is payable at the office of the bank located outside of the Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposits or of insured deposit: Provided, further, That, subject to the approval of the Board of Directors, any insured bank which is incorporated under the laws of the Philippines which maintains a branch outside the Philippines may elect to include for insurance its deposit obligations payable only at such branch. According to Republic Act No. 9302 otherwise known as the Charter of the Philippine Deposit Insurance Corporation, two sections were cited relating to PDICs claim process. SECTION 4 (Section 3 of the same Act is hereby re-numbered as Section 4) states that the term "insured deposit" means the amount due to any depositor for deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date of closure, but not to exceed Two hundred fifty thousand pesos (P250,000.00). Such net amount shall be determined according to such regulations as the Board of Directors may prescribe. In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefit either in his own name or in the name of others. A

joint account regardless of whether the conjunction "and," "or," "and/or" is used, shall be insured separately from any individually-owned deposit account: Provided, That (1) If the account is held jointly by two or more natural persons, or by two or more juridical persons or entities, the maximum insured deposit shall be divided into as many equal shares as there are individuals, juridical persons or entities, unless a different sharing is stipulated in the document of deposit; and (2) If the account is held by a juridical person or entity jointly with one or more natural persons, the maximum insured deposit shall be presumed to belong entirely to such juridical person or entity: Provided, further, That the aggregate of the interests of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of Two hundred fifty thousand pesos (P250,000.00): Provided, furthermore, That the provisions of any law to the contrary notwithstanding, no owner/holder of any negotiable certificate of deposit shall be recognized as a depositor entitled to the rights provided in this Act unless his name is registered as owner/holder thereof in the books of the issuing bank."

SECTION 16. Section 10 (c) of the same Act is hereby renumbered as Section 14 and further amended to read as "SEC. 14. Whenever an insured bank shall have been closed by the Monetary Board pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed bank shall be made by the Corporation as soon as possible either (1) by cash or (2) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor: Provided, however, That the Corporation, in its discretion, may require proof of claims to be filed before paying the insured deposits, and that in any case where the Corporation is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of competent jurisdiction before paying such claim: Provided, further, That failure to settle the claim, within six (6) months from the date of filing of claim for insured deposit, where such failure was due to grave abuse of discretion, gross negligence, bad faith, or malice, shall, upon conviction, subject the directors, officers or employees of the Corporation responsible for the delay, to imprisonment from six (6) months to one (1) year: Provided, furthermore, That the period shall not apply if the validity of the claim requires the resolution of issues of facts and or law by another office, body or agency including the case mentioned in the first proviso or by Corporation together with such other office, body or agency."

DIMENSIONS OF SERVICE QUALITY In their study entitled Determining the dimensions of service quality in banking industry: Examining the Gronroos model in Iran by Emari, H., S. Iranzadeh and S. Bakhshayesh, 2011, over 20 years ago, Gronroos first proposed that customers overall evaluations of service quality were a result of their assessment of two dimensions, which he termed functional and technical service quality. He proposed that customers compared their expectations to their experience of service quality in forming their judgment (Gronroos, 2002). The Gronrooss model proposes that service quality consists of technical and functional dimensions and that a service organizations image functions as a filter in the perception of service quality (Gronroos, 2002). The model also proposes that there are direct relationships between service quality perception and the technical and functional quality dimensions, in addition to the indirect effects of technical and functional quality on service quality perception. Finally, the model suggests that service quality leads to customer satisfaction (Kang and James, 2004). Measuring service quality is a challenge because customer satisfaction is determined by many intangible factors as it contains many psychological features. The authors of the service quality gap model developed an instrument called SERVQUAL for measuring the five dimensions of service quality: tangibles, reliability, responsiveness, assurance, and empathy. It has an initial section to record customer expectations for a class of services followed by a second section to record a customers perceptions for a particular service firm (Fitzsimmons et al., 2002). Based from a study done in Sunway University College by Khong Kok Wei (June 2009) entitled Service Quality Index: A Study on Malaysian Banks, service quality is the difference between the dimensions in customers perceived service and expectations of service (Parasuraman et al., 2003). This was shown in gap 5 in figure 1. Parasuramans SERVQUAL model was perhaps one of the most widely-used frameworks in addressing service quality. The service gap described in the model highlighted the disparity between the dimensions of expectation and perception in service experience. Based from the article from ABAC Journal Vol. 29, No. 1(January-April 2009, pp.24-38) entitled Impact of Service Quality, Trust, and Customer Satisfaction Endanger Customer Loyalty? by Mohammad Muzahid Akbar1 and Noorjahan Parvez Parasuraman et al. (2003) identified five dimensions of service quality (viz. reliability, responsiveness, assurance, empathy,

and tangibles) that link specific service characteristics to consumers expectations.(a) Tangibles - physical facilities, equipment and appearance of personnel; (b) Empathy - caring, individualized attention; (c) Assurance - knowledge and courtesy of employees and their ability to convey trust and confidence; (d) Reliability - ability to perform the promised service dependably and accurately; and (e) Responsiveness - willingness to help customers and provide prompt service. After a comprehensive review of service quality studies, Asubonteng, McCleary, and Swan (2000) concluded that the number of service quality dimensions varies in different industries. For example, Kettinger and Lee (2001) identified four dimensions in a study of information systems (IS) quality, which did not have tangible dimension. Cronin and Taylor (2001) developed a one-factor measurement instrument instead of the five-factor measures proposed by Parasuraman et al. (2003). Besides SERVQUAL, Sureshchandar, Rajendran, and Anantharaman (2003) have identified five factors of service quality from the customers perspective. Those are: a) Core service or service product, b) Human element of service delivery, c) Systematization of service delivery: non- human element, d) Tangibles of service, and e) Social responsibility. After a close inspection it could be safely concluded that the newly defined construct of service quality by Sureshchandar et al. (2003) has some resemblance with the definition provided by Parasuraman et al. (2003). For this study the researchers have employed the five dimensions of service quality proposed by Parasuraman et al. (2003). TRUST

A research conducted by Markus Knell and Helmut Stix of Oesterreichische National bank (November 2009) entitled Trust in Banks? Evidence from normal times and from times of crises, the paper is related to the literature in several dimensions. In the literature one can find a large number of studies that analyze the relationship between trust and economic growth or other measures of economic performance (Knack & Keefer 2000). Most of this literature has in fact focused on the general trust question" (i.e. trust in other people) and there exists less research that explicitly focuses on institutional trust, in particular on trust in financial institutions. It has been argued that the very nature of financial contracts requires a particularly high level of trust: \While trust is fundamental to all trade and investment, it is particularly important in financial markets, where people depart with their money in exchange for promises. Promises that aren't worth the paper they're written on if there is no trust" (Sapienza & Zingales 2009). In

accordance with this proposition, some papers have shown that trust is positively correlated with access to credit, the use of checks, lower interest rate margins, stock market capitalization, households investments in stocks and deeper and more efficient financial markets in general (see e.g. Porta et al. 2000, Calderon et al. 2002, Guiso et al. 2004, Guiso et al. 2008. In a business context, much of the discussion about the meaning of trust has its origins in literature relating to organisations and organisational analysis. Within this body of research, trust has attracted the interests of psychologists, sociologists, economists and management researchers; consequently, there are a variety of different approaches to and definitions of the concept of trust. What is apparent from the many different definitions and approaches to trust is that there are certain key themes that emerge and appear to be recognised as integral to the concept of trusts. Trust depends on the existence of risk - if the outcomes of a particular action are certain, then there would be no need to trust. Trust depends on interdependence between actors - if actors are not somehow dependent on each other,there is no need to trust. Trust is associated with vulnerability - risk and interdependence create vulnerability. Trust involves confident expectations about future behaviours - an actor will only accept vulnerability in the presence of strong expectations of the positive future behaviour of another actor. Some form of trust is likely to be inherent in most relationships - few are, or can be, characterised by complete certainty or complete contracting. ( http://www.businessdictionary.com/definition/business-trust.html)

Trust in the financial system despite some claims to the contrary has not collapsed. This preservation of a rather high level of trust in the domestic banking system is likely to have contributed to the so far manageable consequences of the financial crisis and the absence of noticeable panics or bank-runs. Nevertheless, the decrease in financial trust is certainly not negligible and it is too early to say whether it constitutes a transitory phenomenon that will revert over time (as it has been the case for the trade unions) or whether it does represent a structural break involving a new long-run equilibrium value and a permanent decrease in trust. A crucial question in this context is whether the decline in trust is simply a consequence of the general economic downturn or whether it constitutes a genuine level shift. In the former case one can expect trust to return to its pre-crisis value while in the latter case confidence in the banking system might be damaged for a longer time with possible detrimental effects for financial intermediation.

The restrained decline in trust might be explained by the fact that policy measures like the extension of deposit insurance coverage were successful in maintaining trust. Furthermore, financial trust is likely to be influenced by the perceived and expected performance of banks and for a typical Austrian bank customer their performance through the crisis periods was satisfactory | no relevant bank collapsed and customers experienced no losses. This is also reflected in the fact that important socio demographic characteristics like education do not matter and that interpersonal differences in the level of trust can be described mainly by subjective variables related to the economic sentiment and to uncertainties in relation to the financial crisis. This result, however, contains also a risky implication that points to the potential fragility of the situation. Trust, being itself an attitude, is not an easily tangible phenomenon. The fact that it is mainly related to other attitudes and subjective variables means that it can change quickly and in an unexpected and unprecedented manner from one period to the next. According to Mohammad Muzahid Akbar1 and Noorjahan Parvez in their study Impact of Service Quality, Trust, and Customer Satisfaction Endanger Customers Loyalty, in business, trust is viewed as one of the most relevant antecedents of stable and collaborative relationships. Researchers had established that trust is essential for building and maintaining long-term relationships (Rousseau, Sitkin, Burt, & Camerer, 2001; Singh & Sirdeshmukh, 2000). Morgan and Hunt (2004) stated that trust exists only when one party has confidence in an exchange partners reliability and integrity. While defining trust Moorman, Deshpande, and Zaltman (2004) referred to the willingness to rely on an exchange partner in whom one has confidence. According to Lau and Lee (2002), if one party trusts another party that eventually engenders positive behavioral intentions towards the second party. From Anderson and Narus (2000) it can be safely deduced that if one party believes that the actions of the other party will bring positive outcomes to the first party, trust can be developed. Doney and Cannon (2007) added that the concerned party also must have the ability to continue to meet its obligations towards its customers within the cost-benefits relationship; so, the customer should not only foresee the positive outcomes but also believe that these positive outcomes will continue in the future. The definition provided by Morgan and Hunt (2004) has been used for this study.

A Research conducted by Dr. Brad Rawlins of Brigham Young University (2003) has demonstrated the basic concept here is that organizational transparency leads to greater trust in the organization, which results in improved organizational efficiency and lower costs of doing

business. For more on this chain of causation, Measuring Trust and Mistrust" in his book Measuring Pubic Relationship the more transparent people perceive an organization to be, the more likely they are to trust the organization. And the more the organization provides honest, open, and occasionally vulnerable communications, the more people trust the institution. "Organizations that encourage and allow public participation, share substantial information so their publics can make informed decisions, give balanced reports that hold them accountable, and open themselves up to public scrutiny, are more likely to be trusted." the concept is that greater transparency leads to greater trust, which in turn leads to improved efficiency and lower costs. And, probably, more open government. So you use the survey to see where you stand on transparency/trust, then you take some steps to improve. In that book chapter, he show how to measure trust using the Grunig relationship survey. Another way to measure trust is by way of its close connection to transparency. And since transparency is a hallmark of open government, measuring transparency is an essential start to measuring open government. The truth is, without transparency you can't have trust. And without trust, you can't govern. He also mentioned details about the measurement of trust, It has been a widely studied concept both by itself and, most importantly, as a component of the quality of relationships. Has shown that trust is one of six independently measurable components of relationships. Two of the other components are exchange and communal, each with its own relationship to trust Exchange relationship: In an exchange relationship, one party gives benefits to the other only because the other has provided benefits in the past or is expected to do so in the future. Exchange is the essence of marketing relationships between organizations and customers and is the central concept of marketing theory. Many relationships begin as exchange relationships and then develop into communal relationships as they mature. Communal relationship: All parties in a communal relationship provide benefits to each other because they are concerned for the welfare of the other, even when they get nothing in return. Communal relationships are essential to developing and enhancing trust in an organization. Communal relationships are important if organizations are to be socially responsible and add value to society as well as to client organizations. They also greatly reduce the likelihood of negative behaviors from stakeholders.(Rawlins 2003)

Research on trust has shown that it is a multi-dimensional concept of dimensions of trust Based on Jim Grunig (2003) has identified three dimensions of trust that are measurable by the Grunig Relationship Survey Competence: The belief that an organization has the ability to do what it says it will do, including the extent to which an organization is seen as being effective, and that it can compete and survive in the marketplace;(a)Integrity: The belief that an organization is fair and just,(b)Dependability/reliability: The belief that an organization will do what it says it will do, that it acts consistently and dependably.

Although the experts are not in complete agreement, trust between an organization and its publics is generally described as having the following independently quantifiable characteristics: Multilevel: Trust results from interactions that span coworker, team, organizational, and inter organizational alliances, which is why you need to cast a wide net when you survey your publics on trust. Culturally-rooted: Trust is closely tied to the norms, values, and beliefs of the organizational culture. Therefore it is critical to understand the self-image and self-definitions of your publics if you are going to accurately measure trust. (c) Communicationbased: Trust is the outcome of communications behaviors, such as providing accurate information, giving explanations for decisions, and demonstrating sincere and appropriate openness, which is why communications metrics are critical in trust measurement. (d) dynamic: Trust is constantly changing as it cycles through phases of building, destabilization, and dissolving, so it is important to measure trust on a continuum over time. Multidimensional: Trust consists of multiple factors at the cognitive, emotional, and behavioral levels, all of which affect an individuals perceptions of trust. (www.instituteforpr.org/wp-content/uploads/2003_MeasuringTrust) According to Guiso et al. (2000) a financial contract is trust intensive in itself. Trust and economic performance, and some country-specific evidence about the impact over financial development has also been found. The relationship between trust and financial development is straightforward .In a financial contract the lender transfers money to the borrower in the present expecting that the borrower will return it in the future. In order to avoid opportunistic behavior, additional clauses such as collateral requirements are added to the contracts. Despite this, in many cases requirements can lose their effectiveness due to the inefficiency of regulations, for example those regarding the repossession of collateral in case of dispute, or due to the lack of

enforceability of contracts. In such particular cases, the amount of debt issued by lenders will boil down to how much they trust that borrowers will repay. Even if rules are enforceable, financial contracts are intrinsically incomplete, which implies that no contract can fully guarantee that the creditor will recover his funds. This implies that even in cases where the rule of law holds, trust will also play a role as a determinant of market breadth; however one can expect a greater importance in countries with lower law enforcement or lower creditor protection. In theory we expect trust to be positively related with measures of size and activity of the financial sector and negatively with measures of its efficiency. In allocating resources both depositors and lenders are exposed to an optimization problem in which several risks appear. Depositors face the risk that the financial intermediary will adopt opportunistic behaviors due to high monitoring costs, and lenders face the risk that borrowers will default. In either case the final outcome is that the initial owner of the funds will not be able to recover her or his control over them. How important these risks are, and how they end up shaping fund holder decisions depends on several aspects, including of course an institutional dimension. Within this dimension, trust plays an important role. Low levels of trust can exacerbate different sorts of risks. If trust is low, the perceived probability of misbehavior on the borrowers behalf can be higher than where there is high trust. Because of this one can expect countries with lower trust to have smaller financial markets.(Guiso et al.2000) Both depositors and creditors can be influenced by their trust in their counterparts in a financial contract. Depositors lose control over their funds when they trust them to the financial institution, and creditors lose partial control over their funds when transferring them to a debtor. If trust is low, that is if depositors doubt that banks will behave properly and creditors doubt that debtors are willing to repay, fewer agents will be willing to extend credit or to deposit their savings in local banks, and hence financial markets will be small. Regarding efficiency the theoretical implications follow similar lines. Financial intermediaries face higher marginal costs in countries where risks are high. As shown by Angbazo (2007) or Pong Wong (2007), these costs are partially transferred to credit users and deposit suppliers by means of a higher net interest margin. As above, if financial risks are exacerbated by lower trust, it can be expected that efficiency measures such as the interest margin will be negatively correlated with trust quality. ( http://198.62.77.13/res/publications/pubfiles/pubWP-444.pdf)