According to a Crisil report released in Mumbai on Wednesday, the last two to three years have witnessed increasing downgrades with 50 per cent of companies having had their rating revised downwards. "The downgrades are attributable to the poor performance of the corporate sector due to slowdown in industrial activity," Crisil said in its analysis of the factors underlying recent rating actions.

The decline in realisations was also partly due to the threat of cheaper imports post easing of import curbs, reduction in import tariffs and decline in global commodity prices following the Asian crisis, the rating agency said.

"The corporate sector has beenfacing difficult business conditions in the last few years due to over-capacity and cheap imports, resulting in stiff competition and depressed prices. The opening of the economy and delicensing of industries resulted in a large number of corporates expanding their capacities and modernising facilities in anticipation of high growth in demand," Crisil said, adding that the fall in exports and demand recession in the economy, which started by the time capacities came into place, further crippled the corporate funds position and business plans.

"Consequently, companies were not able to run their new capacities fully, resulting in high levels of fixed costs," the rating agency said, adding that the glut situation in the market also led to a fall in realisations impacting profitability of most companies.

Companies resorted to increased debt funding for projects and in some cases, companies were unable to raise long-term debt and had to resort to short term borrowings by way of inter-corporatedeposits.

"Lack of growth in domestic demand and fall in realisations on the other hand resulted in inadequate internal cash generations by corporates. This coupled with large repayment pressures due to debt funded projects and difficulty in raising long-term debt impacted the liquidity position of companies and resulted in a significant proportion of companies delaying or defaulting in repayments," Crisil stated.

"Crisil's rating actions have a fairly strong correlation with leading indicators like Gross Domestic Product (GDP), Index of Industrial Production (IIP) and capital market performance," the report said.