Banks expect their net interest margins to grow for at least two quarters because of the lag effect of the repricing of deposit rates.

The lenders have seen a rise in net interest margin because of an increase in interest rates on loans but there has been a lag in rates being raised on the deposits.

The SBI, the country’s largest bank, has posted a domestic net interest margin of 3.55 per cent during the quarter ended September 30 up from 3.23 per cent in the quarter ended June.

Punjab National Bank’s domestic NIM has grown to 3.11 per cent during the second quarter from 2.9 per cent during the first quarter. Even private lenders have seen a rise in NIM during the second quarter.

“For another quarter or two, we should see margins getting better because of the lag effect which is there in terms of deposit cost going up,” said Sanjiv Chadha, managing director and CEO of Bank of Baroda.

“To the extent that margins are being exaggerated between advances and deposits being repriced, that would eventually moderate. But, there is an upside in terms of normalisation of liquidity,” he said.

“The rates have changed 90 basis points in the June quarter and 100 basis points in the September quarter and the market prediction is that there is more to come in the December quarter and March quarter. We do not know what the terminal rate is for sure yet, but as the rate goes up there is a continuation of the lead and lag effect going through,” said Srinivasan Vaidyanathan, chief financial officer, HDFC Bank, at the quarterly earnings call.

The net interest rate spread — the difference between weighted average lending rates (outstanding) and weighted average term deposit rate — was at 3.85 per cent in September.

The spread for both public sector banks and for private banks continues to remain elevated compared with pre-pandemic rates.

According to data compiled by Care Ratings, deposit rates for public sector banks, private banks and scheduled commercial banks have increased by 8, 10 and 9 basis points on a month-on-month basis respectively in September, but they continue to be lower than the pre-pandemic levels by around 100 basis points.