London Scottish Bank, which lends to lower-income families and operates as a debt collector, has scrapped its dividend after falling £15.7 million into the red last year.

The loss, which came amid soaring bad debts, was substantially worse than the £11 million expected by the market. The bank made a £15 million profit the previous year.

London Scottish, which has been in discussions for five months with the City's watchdog, the Financial Services Authority (FSA), over its capital base, said that it had a capital shortfall of £12.7 million on January 1.

The FSA had ordered it to dramatically increase its reserves, but the bank said today that it had agreed a plan which would involve selling parts of the business, reducing lending volumes, scrapping the dividend and seeking alternative funding.

The bank said that it would consider selling its invoice factoring business and closing or selling its consumer lending operation to concentrate on debt collection. It said that it would issue an update at the annual meeting on April 23.

For the year to October 31, losses from the unsecured-consumer-credit business jumped to £22.4 million compared with a £5 million profit in the previous year, while bad debts at the division climbed 25 per cent to £32.3 million. Profits from debt collection rose by 57 per cent to £13.9 million and from its mortgage and secured lending business by 20 per cent to £3.3 million.

The bank said that trading conditions continued to be tough in the three months to the end of January, with unsecured consumer credit lending making a £1.9 million loss compared with a £600,000 profit in the same period last year, while profits from debt collection fell from £3.7 million to £1.9 million in the first quarter of the current financial year.

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