DFCC Bank and National Development Bank, both listed, will have to merge and become a stronger bank, he said, during the Central Bank's annual policy speech Thursday.
The two banks have substantial private ownership, but they also have state shareholders.
Smaller private banks with less than 100 billion rupees in assets should grow or merge during a 'reasonable period' Cabraal said.
Smaller state banks should also merge, he said.
Banks are expected to submit plans for mergers by June 2014.
State-run Bank of Ceylon and People's Bank is expected to expand their international presence