The ratings of several major Indian companies including Tata Motors, Ashok Leyland, Citibank, DLF, Mahindra and Mahindra and Suzlon came under CRISIL 's hammer during the year 2008-09, says a study released yesterday,

A slowing economy, and a sharp downturn in the investment environment, particularly during the second half of 2008-09 have affected the credit quality of Indian companies; CRISIL  downgraded ratings on 84 entities in 2008-09, while upgrading those on only 2. In contrast, there were 14 downgrades and 9 upgrades in 2007-08.

As many as 68 of the 84 downgrades were driven either by inadequate funding, or by a sharp decline in demand, or both.

Of these, 15 were from the automobile and automotive ancillaries industries, 14 from the financial sector, 8 from the textiles industry, and 7 each from the metals and mining industry and the construction and real estate industry.

Some were downgraded only by a few notches, while some others like Arvind Ltd, Decolight Ceramics, Krypton Tyres, Soma Textiles, and Marck Bio Sciences were downgraded to default category 'D', CRISIL  says in its latest Ratings Round-up.

Moreover, after three years with no defaults, CRISIL 's rated portfolio registered as many as 13 defaults in 2008-09, albeit on a much larger base: as on March 31, 2009, CRISIL  had ratings outstanding on about 1600 entities, up significantly from about 400 a year ago.

The two upgraded entities during the period are pulp and paper manufacturer, Shreyans Industries (from D to BB/Stable) and Global Trade Finance Ltd (from AA to AA+/Stable).

CRISIL had earlier highlighted access to funding at reasonable rates, the intensity of the demand slowdown, and movements in foreign exchange rates as the key drivers of Indian companies' credit quality.

Moreover, after three years with no defaults, Crisil's rated portfolio registered as many as 13 defaults in 2008-09, albeit on a much larger base. Of these, seven were in the textile industry, and three were suppliers to the real estate industry.

Most entities that defaulted on their debt obligations did so after facing a severe strain on their working capital positions, because of the economic slowdown.

Crisil's modified credit ratio (MCR, the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations) reached a 10-year low in 2008-09 at 0.86 times, declining from 0.97 times for 2007-08.

The previous low for CRISIL's MCR was in 1998-99, at 0.61 times. However, the intensity of the decline in MCR between 2004-05 and 2008-09 has been less severe than that of the decline between 1995-96 and 1998-99. This is because both manufacturing and financial sector entities have much stronger balance sheets this time around, to support their credit quality.

As on March 31, 2009, 13.8 per cent of CRISIL's long-term ratings had negative outlooks, the highest since the rating agency introduced rating outlooks in 2003. This indicates that continued economic deceleration can cause more downgrades over the next 12 to 18 months, unless the ongoing efforts to revive the global economy with fiscal and monetary measures start showing results.

The steep increase in the number of downgrades and defaults in 2008-09, particularly in the second half, were driven by the sharp economic slowdown as evidenced in the decline in growth rates of both Gross Domestic Product (GDP) and the Index of Industrial Production (IIP), and the consequent decline in corporate profits and profitability.

The Indian economy slowed significantly during the nine months ended 31 December 2008, with GDP growth at 6.9 per cent; this is in contrast to 9 per cent growth in 2007-08, and 9.6 per cent growth in 2006-07. In particular, GDP growth declined sharply to 5.3 per cent for the quarter ended 31 December, 2008; this is the slowest quarterly growth the Indian economy has registered in the past six years.

Slower demand growth, higher funding costs, and volatile exchange rates, have caused corporate earnings to decline from the highs of 2007-08. The aggregate net profit of 4681 companies in the S&P CNX 500 index, for the quarter ended 31 December 2008, has declined by 23 per cent as compared to the corresponding quarter of the previous year, and 21 per cent over the second quarter of 2008-09, CRISIL  noted.

CRISIL  says there may be more downgrades over the course of the next year, unless there is a quick and sharp turnaround in the domestic and global economy. While RBI has taken several measures to reduce the cost of credit in the banking system, banks have not passed on the benefits of lower policy rates to their borrowers in full, apprehending increased credit costs arising from deterioration in asset quality.

''While governments and central banks all over the world have undertaken numerous fiscal and monetary measures to stimulate growth, the impact of these steps will be visible over the next six months, and will be the key monitorable for future trends in credit quality,'' the report said.

CRISIL , the foremost rating agency in India, is majority owned by global rating giant Standard and Poor's. It has assigned its first bank loan rating in July 2007, and its 1000th in January 2009. As on 31 March 2009, CRISIL  has ratings outstanding on debt instruments of about 1,600 entities.

(See: List of companies regraded by CRISIL)