RAM Ratings (Lanka) said the sector has benefitted from falling interest rates which has increased margins due to deposit rates falling faster than rates on loans.
RFCs have taken steps to rein in bad debts which together with improving macroeconomic conditions will help improve asset quality, the rating agency said.
The sector is also recovering from a confidence crisis triggered by the fall of an unregulated finance company.
"RFCs showed an acceleration in loan growth across the industry, supported by the opportunities of the post-war era and the more favourable macroeconomic conditions," RAM Ratings said.
"The expansion in the loan base has resulted in the moderation of liquidity and capitalisation levels; however, these levels are adequate."
The rating agency said that while asset quality remains weaker than that of banks, as the sector caters to a high-risk segment, there has been increasing awareness among most RFCs to improve asset quality.
"Meanwhile, the sector