Sri Lanka, now recording a GDP growth rate of 7%, remains one of Asia's fastest growing economies, prompting Moody's Investors Service to issue a stable outlook for the country's banking system.
Since the end of the long civil war in 2009, the country has been rebuilding, and a pipeline of infrastructure projects is expected to boost economic growth, together with an accommodative monetary policy.
"In such an environment, loan growth will rebound and asset quality will stabilize," says Srikanth Vadlamani, a Moody's Vice President and Senior Analyst.
Moody's stable outlook for the country's banking system is also consistent with its stable outlook on the Sri Lankan government's B1 rating.
"Our analysis estimates 14% loan growth this year and we do not view this as excessive," says Vadlamani.
However, the key risk to the outlook for economic growth is Sri Lanka's high current account deficit and a resulting reliance on external debt capital flows.
"This structural weakness exposes the economy and currency to shifts in investor sentiment," adds Vadlamani.
However, in this context, the Moody's report notes that Sri Lanka's banks and sovereign have been able to access the international debt markets at relatively attractive yields, compared to past averages, over the last year, indicating the high confidence of foreign investors in the economy.
On the issue of pawning loans, the report says that non-performing loans (NPLs) -- which had risen because of widespread use of these gold-secured loans -- should stabilize after a sharp increase in 2013.
"We note that lending standards have tightened and, given that these loans have a tenure of only around 12 months, we expect NPLs in this segment to start stabilizing from around the third quarter of 2014," says Vadlamani.