Fitch Ratings lowered its sector outlook for Sri Lankan banks to negative from stable as rising macroeconomic pressures will likely strain banks' credit metrics.

The rating agency said Dec. 8 that it expects downside pressure on growth for Sri Lanka in 2017. The negative outlook on the banking sector reflects the impact of the negative outlook on the sovereign.

Asset quality for Sri Lankan banks will likely deteriorate in 2017 following lending to more susceptible segments, with nonperforming loan ratios likely to rise amid a challenging environment.

Capitalization is an issue facing the sector due to thin capitalization across state banks. The Central Bank of Sri Lanka could also impose higher capital requirements, such as through the implementation of Basel III capital standards.