The non-banking financial institutions (NBFIs) have also demanded waiver of tax deduction at source on the interest of zero coupon bonds.

"The NBFIs were so long exempted from payment of interest on term deposits, but the budget for the fiscal year 2005-06 has asked to deduct tax at the rate of 10 percent on interest or profit on the date of payment or credit," said A Quader Chowdhury, chairman of BLFCA.

Financial institutions have been facing serious liquidity crunch, he said adding that this newly imposed restriction should be withdrawn considering the limitation of resource mobilisation capacity of the financial institutions.

"I would like to draw the attention of the National Board of Revenue (NBR) to review its decision of tax deduction at source imposed in the last budget wherein 10 percent tax has been imposed on term deposits in line with the banks," he said.

The association members led by Quader Chowdhury at a meeting urged the central bank governor recently to address their problems.

Quader explained that the contribution of the BLFCA in industrial credit is between 15 and 20 percent, adding that such financial institutions need exemption from the subject stipulations in the greater interest of these institutions and for the growth of the economy.

Financial institutions have financed and disbursed lease and loan of Tk 31,800 million during January to December, 2004 registering growth of around 37 percent.

These institutions have maintained recovery rate of nearly 95 percent. Total lease and loan assets outstanding as on December 31, 2004 was over Tk 45,000 million. NBFIs have emerged as an alternative source of finance and well-sought-after arm for credit for small and medium enterprises (SMEs).

In the face of the changed economic scenario, most of the financial institutions have diversified their products and services to new areas like small loan, housing loan, start-up working capital, domestic factoring and others.

Further to reduce the dependence on traditional borrowing against credit lines from banks, some of them have already initiated new financial tools like bonds, securitisation of assets, which have set new trend for others to follow.

Zero coupon bonds are issued to strengthen the resource mobilisation capacity of the NBFIs and also help diversify the traditional financial market.

NBFIs like IPDC, IDLC and United Leasing floated zero coupon bonds in 2004 and 2005 for institutional investors, but the fresh imposition of tax on the bonds is discouraging other NBFIs to issue such product.