Cattles, the sub-prime and doorstep lender, is facing a potentially catastrophic delay in its attempt to secure a banking licence.

The Financial Services Authority’s decision to toughen up its qualifying criteria sent shares in the West Yorkshire group down as much as 25 per cent yesterday amid market speculation that the regulator had turned down Cattles’ application for the licence, made in August.

The group wants to secure about £1 billion in retail deposits by 2010 in order to help to reduce its reliance on the wholesale markets for funding.

Cattles responded to the fall in its shares by telling the stock market that hopes of winning the licence were still alive. However, it said that its expectations of finding out by February had been dashed by the FSA’s decision.

“Given the current banking environment and market conditions, the FSA is proposing more stringent tests for firms. As a result, Cattles’ application is proceeding at a slower pace than the company had previously anticipated,” Cattles said. It said it had made a detailed submission to the regulator but was dealing with requests for additional information. “A final decision on whether Cattles’ application has been granted will not be made by the FSA until its inquiry process is completed,” the lender said.

However, the shares failed to recover, closing down 7p, or 18.9 per cent, at 30p. A Cattles spokesman noted that all applicants, and not only Cattles, would face harsher tests of liquidity and stress-testing, although he acknowledged that it was a setback.

Cattles is relying for funding on an expensive £500 million credit line from its banks, led by Royal Bank of Scotland. It is trying to renegotiate the facility, which matures at the beginning of July but is suffering increasingly punitive lending rates until then.

David Postings, Cattles’ chief executive, had been hoping that a deeply discounted £209 million rights issue completed in June would have provided sufficent capital to qualify the lender for a licence. The previous year, Cattles tapped its investors for £133 million to fund its expansion drive. Like other sub-prime lenders, it has been benefiting from the unwillingness of traditional high street providers to lend, in particular to borrowers with patchy repayment histories.

However, the toughening of the FSA’s stance means it is unclear whether Cattles has raised sufficient funds or what additional steps it might have to take before securing approval.

Sarah Spikes, an analyst at Arden Partners, said the delay was bad news for Cattles. She said having a banking licence was a crucial step in resolving its funding situation.

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