Rationale

 For arriving at the ratings of Edelweiss Financial Services Limited (EFSL), ICRA has taken a consolidated view of the Edelweiss Group1 (the Group), given the close linkages between the Group entities, common promoters and senior management team, shared brand name, and strong financial and operational synergies. The rating take into account the Group's established position in the financial services industry, its long-standing experience in the capital market related business, its diversified business profile with a presence in the asset reconstruction, asset management and wealth management segments, and the healthy stream of fee and advisory income. These strengths are partially offset by the weakening in the asset quality of the credit business, the risks associated with the distressed assets business given the focus on corporate assets coupled with the evolving nature of the industry, and the exposure to volatility in capital markets. The Group's reported gross non-performing assets (GNPAs; as per the Reserve Bank of India's (RBI) prudential norm) increased to 7.7% of total advances as of March 31, 2021 from 5.3% as of March 31, 2020. The stage 3 assets to loans at amortised costs ratio (43.5% as of March 31, 2021 and 26.9% as of March 31, 2020) is significantly higher as the security receipts (SRs) held by the Group, issued against assets sold by it to asset reconstruction companies (ARCs), continue to be recognised as loans in the consolidated book. Moreover, the Group's collection efficiency risk has exacerbated due to the Covid-19 pandemic. The Group's collection improved during the fourth quarter of FY2021, however there has been dip in the collection during April/May 2021 due to the second wave partial lockdown. Thus, its ability to maintain healthy collections in the next few quarters would remain a key monitorable. The resultant high credit cost over the past two fiscals has resulted in a drag on the Group's core profitability. While Edelweiss Financial Services Limited (EFSL) reported a profit including minority of Rs. 254 crore in FY2021 at the consolidated level after reporting a loss of Rs. 2,044 crore in FY2020, the profitability was supported by the divestment of its wealth management business.2 The Group is actively pursuing various alternatives for resolving potential stress and managing the portfolio. Supported by such endeavours, the wholesale assets in ECL Finance Limited declined to Rs. 11,413 crore as of March 2021 from Rs. 17,678 crore as of March 2019. Going forward, the progress on such endeavours and the impact on the Group's asset quality would be important from a credit perspective. ICRA also considers the continued funding challenges and widening credit spreads. The Group raised funds of Rs. 9,508 crore (including through sale of controlling stake in Edelweiss Wealth Management) compared to Rs. 12,922 crore in FY2020. The share of commercial paper (CP) reduced to 2% of the Group's total borrowings as of March 31, 2021 from 14% as of March 31, 2018. However, the Group has demonstrated the ability to raise equity funds at regular intervals by way of compulsory  convertible debentures (CCDs) in the credit business and wealth management business. ICRA also notes that on July 01, 2021, the Group entered into an agreement to divest its remaining shareholding of 70% in Edelweiss Gallagher Insurance Brokers Limited, subject to receipt of regulatory and other appropriate approvals. The Group's ability to maintain healthy collections, consistently raise resources from diversified sources and ensure a comfortable asset-liability matching (ALM) profile, in future, would be a key rating monitorable. ICRA notes that the Group has been trying to simplify its complex structure with multiple cross holdings. It has brought in a strategic partner at the credit, wealth management, ARC and life insurance verticals. With the change in the structure, the Group's erstwhile business model with seamless interaction (in terms of business and fund flow) between various entities (and verticals) may alter in the medium term. However, the Group would continue to support various ventures, given the shared brand name and operational and strategic linkages. The fund flow across various entities would be done, if required, at market rates and on an arm's length basis with the approval of the board of directors of the respective companies/verticals. The Negative outlook reflects the expectation of continued portfolio stress and subdued profitability over the near term due to the declining loan book and net interest income and the challenging external environment. The Group's ability to keep credit costs/impairments in check and generate healthy fee income would remain key for profitability. Furthermore, the Group's ability to raise and diversify its borrowings and maintain a comfortable liquidity profile would be a credit-sensitive factor.