Batley-based Cattles revealed yesterday that a squeeze on customers' disposable income had helped push up instalment arrears and last night chief executive David Postings warned that this would worsen.

However he insisted that Cattles was able to withstand a further downturn in the economy.

Earlier this week Gordon Brown admitted for the first time that the UK was heading for a recession.

Mr Postings said: "Next year I would expect our arrears will continue to rise but the business is set up to manage that."

He spoke as Cattles' interim management statement said that instalment arrears had risen from 7.2 per cent at the end of June this year to 7.4 per cent at the end of September.

But the lender also said that trading was in line with expectations.

Cattles still plans to obtain a banking license and move into the savings sector, but believes its high core Tier One capital ratios will ensure it is seen as a safe institution despite the turmoil in the sector in the last two months.

Mr Postings said that Cattles still plans to raise new debt funding although this would be next year rather than in the final quarter of this year.

"We feel very positive about that (the move into banking]. We hope to take deposits at the end of this year or early next year.

"We were just about to do something when Lehman's went and it put the kibosh on it."

He said that the combination of its high Tier 1 capital ratio of 20 per cent and its expected winning of a license in the tougher regulatory climate would ensure Cattles is seen as a safe bank.

The firm's management statement, which covered the three months to September 30, anticipated that 2008 would be a "successful trading year" based on strong demand.

However, it went on to say that volumes had been reduced and new business pricing increased.

"In response to the current economic environment and the increasing pressure on household budgets, the business has further tightened its credit and affordability criteria to new applications.

"The squeeze on consumers' disposable income and the planned reduction in receivables growth, has led to an increase in instalment arrears.

"The group's significant investment over a number of years in systems and arrears management infrastructure has enabled the loan loss ratio to remain in line with expectations and within the group's long established target range."

Mr Postings said Cattles' arrears had risen because the volumes it had been lending had been lower so it faced a higher impairment.

"So as the loan book ages we get more arrears."

But he insisted: "We are local to our customers. We understand their capability if they lose their job and have difficulty paying – unlike a prime lender or a high street bank."


Still banking on it

Cattles wants to become a bank despite the UK seeing two months of unprecedented shocks to the banking system.

Its application for a banking license has been sent to the Financial Services Authority and Cattles said this is "progressing to plan".

In August it awarded a five-year contract to Newcastle Building Society to provide back office and telephone support for the proposed online savings offering. A new retail brand will be used for savers.

David Postings, Cattles chief executive, said: "We are looking for a small market share of less than 0.2 per cent. We will offer safety and a good rate of return.

"The fact that there are fewer banks (compared to a year ago] will help us and reduce competition."