Shares in London Scottish Bank were hit as the subprime lender and debt collector said it would fall short of regulatory capital requirements and may be unable to pay a final dividend.

Trouble has stemmed from increased impairment provisions for the company in the unsecured consumer credit division, which lends to people with patchy credit records.

Shares fell by nearly 18 per cent to 63p by lunch time.

LSB said results for the year ended October 31 would be affected by additional charges of up to ?22m, predominantly from this division. LSB said it was increasing provisions following recent difficulties in recovering bad debts.

To comply with Basel II, which measures banks' capital, LSB said it was required to hold "significantly more" regulatory capital.

This, coupled with the impact of the additional impairment provisions, would result in a shortfall of regulatory capital of about ?13m, it said.

"Until the company has remedied the shortfall of regulatory capital, it may have to restrict new lending volumes and may be unable to pay a final dividend in respect of the year ended October 31," LSB said.

LSB said the difficulties it was experiencing in the consumer credit division were mainly as a result of the closure of nearly half of its branches as part of the company's recent rationalisation programme.

"While there is an element of people finding it more difficult to pay, the largest element has been factors related to the rationalisation programme and branch closures. The closures have made it more difficult to recover bad debt" Robin Ashton, chief executive said.

LSB has culled branches from 100 to 52 in this division as part of a rationalisation programme.

Asked whether the company might consider putting the branch closure programme on hold in order to help recover debts Mr Ashton said "all options would be considered". However Mr Ashton, who has been in the post for four weeks, said he would not comment on specifics until he had "had a good look at what was going on in the business".

LSB said it was working with the Financial Services Authority and would this week start discussions with the regulator about action to address the shortfall.

LSB said it would submit the necessary capital adequacy assessment to the regulator during the next few months so that the FSA could set formal Individual Capital Guidance.

"The directors consider that the company continues to have a strong balance sheet, enhanced by the disposal of its leasing business and head office freehold premises during the last nine months." LSB added it continued to comply with all the covenants in its banking agreements.

LSB has been the subject of a number of takeover approaches, most recently from Cattles a rival subprime lender. It has diversified away from unsecured consumer credit and its biggest business is Robinson Way, which specialises in debt collection and accounts for more than half of its profits.