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In 1991, we introduced an incentive
to encourage banks and merchant banks to build
up their level of general provisions as a cushion
against unexpected losses. Each year, banks and
merchant banks are allowed to claim tax deduction
on general provisions of up to 25 per cent of
qualifying profits or 0.5 per cent of qualifying
loans and investments, whichever is lower. For
each bank or merchant bank, the level of tax deductible
general provisions on a cumulative basis cannot
exceed 3 per cent of qualifying loans and investments.
Many banks and merchant banks have taken advantage
of this incentive to build up their general provisions.
This has helped to enhance the soundness of individual
banks and merchant banks, and also the financial
system, especially during this period of regional
financial turbulence.
To encourage banks and merchant
banks to further build up their general provisions,
I have decided to temporarily suspend the annual
limits of 25 per cent of qualifying profits and
0.5 per cent of qualifying loans and investments
for a period of two years with effect from Year
of Assessment 1998. This will give banks greater
flexibility to make as much general provisions
as possible to cushion against potential losses
arising from the regional financial difficulties.
The overall limit of 3 per cent of qualifying
loans and investments, which was raised from 2
per cent last year, will remain unchanged. |
