Avi de Silva, chairman of the Colombo Tea Traders' Association, said they were concerned about the proliferation of tea factories unsupported by cultivated tea lands.
"There are over 700 factories presently in operation, of which a very large number fall into this category," he told the CTTA's annual general meeting.
There was a continuously increasing excess in capacity of factories in relation to the availability of green leaf supplied by small farmers.
As a result, the majority of factories are operating under capacity, creating severe competition for leaf, the CTTA says.
But more tea factories also means that smallholders get good prices for their their produce.
This can stimulate higher levels of leaf production.
But the CTTA believes it hurts quality.
"This unhealthy competition has had a negative impact on the quality of the end product, which would eventually be damaging to the image of 'Ceylon Tea'," de Silva said.
New factories continue to be set up despit