"In addition, greater participation from private sector in investments, compared to what was seen over the past few years, should provide an impetus to loan growth," adds Vadlamani.

Vadlamani was speaking on Moody's annual outlook update for Sri Lanka's banking system, titled "Banking System Outlook -- Sri Lanka: Continued Growth Drives Stable Outlook"

According to Moody's, asset quality will stabilize at their current levels.

Asset quality has improved over the past 18 months, with the gross nonperforming loan ratio coming down to 4.3% in June 2015 from 5.6% in December 2013.

Problems in the pawning sector -- the key reason for the pick-up in nonperforming loans in the recent past -- have been addressed.

At the same time, banks' underwriting standards have been fairly tight over the past two years, as reflected in loan growth of only 14% over 2013-14.

Moody's says profitability will remain stable over the next 12-18 months, despite moderate pressure on net interest margins.