Rating agency ICRA has downgraded debentures of Edelweiss Financial Services from "AA" to "AA-" on increased vulnerability in its wholesale lending book and risks of rise in the stressed exposures.

The outlook on debentures remains negative, ICRA said in a statement.

Rating takes into account heightened risks from the underlying assets, comprising real estate and structured debt transactions across sectors. The book is largely untested given the principal moratorium and bullet repayment structure in a significant quantum of the loans.

The financial flexibility of the underlying borrowers is constrained due to a slowdown in their core operations and their (borrowers) leveraged capital structure further adds to the concerns regarding the wholesale book, it said.

The ability of non-banks like Edelweiss to mobilise resources at adequate rates is expected to remain constrained over the near to medium term in the current operating environment. The investors are risk averse towards non-banks, particularly wholesale-oriented entities.

The Group has demonstrated its ability to maintain adequate reported asset quality. But, a prolonged slowdown in the real estate industry coupled with the liquidity crunch in the overall market could have an adverse impact on the same (asset quality).

The risks are, however, partly mitigated by the collateral cover maintained for such exposures coupled with the recent capital raise. The recent capital raise would help reduce the overall leverage and provide some cushion to absorb losses, if any, on the lending book.