Finance companies have grown over the years. Their loans and deposits now account for 13.5 per cent and 12.4 per cent of total domestic loans and deposits. It is therefore crucial for finance companies to build up adequate provisions to cushion against unexpected losses and diminution in the value of their assets. This will enhance the overall soundness and stability of our financial system.

To encourage finance companies to build up their reserves, I have decided that with effect from Year of Assessment 1997, finance companies will be able to claim tax deduction for general provisions made for loans and investment in securities. This tax concession has been available to banks since Year of Assessment 1992.

The tax concession will be available only to finance companies which meet the statutory minimum capital funds requirement of $50 million and minimum capital adequacy ratio of 12 per cent as prescribed under the Finance Companies (Amendment) Act. This is to ensure that only those finance companies whose shareholders have demonstrated their commitment to strengthen the companies' capital will be allowed the incentive to further build up their general provisions. At present, 11 of the 22 finance companies are able to meet such capital requirements.

As in the case of banks, the total amount of general provisions eligible for tax deduction will be limited to 2 per cent of each finance company's prescribed loans and investments. The amount deductible each year will be limited to a per cent of such loans and investments or 25 per cent of each finance company's qualifying profit, whichever is the lower.