At the moment, BFIs have excess liquidity due to an unfavorable investable environment, thus, they are continuously cutting their interest rates. When the BFIs cut interest rates, their cost of funds declines which ultimately brings down their base rate. BFIs issue loans by adding a premium to the base rate. Thus, the interest rates of all loans have declined.
Above all, BFIs are also cutting premium rate added to the base rate.
Bank loans are the main source of investment for hydropower companies to develop projects. Although they collect few funds through initial public offering (IPO), utilization of bank loans is their main source of investment. Currently, BFIs have made investment of Rs 33 billion in hydropower projects.
Therefore, decline in interest rates is somehow a big relief for hydropower companies. for example, if a hydropower company is developing a project with a bank loan of Rs 3 billion, interest cut of only two percent will save Rs 60 million which will ultimately raise its profit.
At present, the base rate of banks has declined to 9 percent. BFIs are providing loans to hydropower companies by adding 0.5 percent premium on base rate. Hydropower companies are getting loans at 10/11 percent which have cut their costs.
Consequently, hydropower companies have double benefit of cost-cutting and an increase in profit. Increase in profit also means increase in dividend capacity of the companies. once the dividend capacity of hydropower companies increase, their stock value will certainly go up in the secondary market.
