Cattles, the sub-prime and doorstep lender, is scrapping dividends for at least a year amid continuing delays in its attempt to secure a banking licence.

The group, which describes itself as a "specialist lender", said that, although trading for the year was in line with expectations, pressure on consumers' disposable income meant that arrears on loan repayments had increased from 7.4 per cent to 7.8 per cent.

It confirmed that its application for a banking licence continued to progress "at a slower pace than we previously anticipated" and talks over a refinancing of its £500 million bank facility, due for renewal in July next year, had still not been concluded.

Shares of Cattles have fallen sharply in recent weeks amid market rumours that the Financial Services Authority’s (FSA) decision to toughen up its qualifying criteria could result in its application for the licence, made in August, being refused.

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

David Postings, Cattles’ chief executive, had been hoping that a deeply discounted £209 million rights issue completed in June would have provided sufficient 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.

Cattles said today that the decision to scrap the final dividend and next year's interim dividend would improve its capital ratio for the licence application and strengthen its hand in talks over refinancing its £500 million facility.

Analysts speculated that the banks, led by Royal Bank of Scotland, had forced the company's hand over the issue.

The group said that it had headroom of £129 million on its current facility, while total borrowings had risen from £2.5 billion to £2.6 billion since September.

Cattles said that its Welcome Finance lending business had seen "moderated volumes and receivables growth" as it tightened its lending criteria. This led to an acceptance rate of 5 per cent, down from 5.2 per cent in June and 6.3 per cent a year ago.

It said the squeeze on disposable income had contributed to an increase in Welcome Finance's loss and arrears ratios.

The shares added 0.5p to 18p in early trading.

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