Payday lender Wonga has said it will write off the debts of 330,000 customers whose loans would not have been approved under new affordability guidelines.
Sky sources said the cost of writing off the debt to the company would be £35m.
There is £220m debt outstanding for the customers affected, at an average loan value of £667 per borrower.
The short-term lender said it would contact the borrowers by October 10.
City watchdog the Financial Conduct Authority (FCA) said the 330,000 customers who are currently in excess of 30 days in arrears will have the balance of their loan written off and therefore owe Wonga nothing.
And some 45,000 customers who are between zero and 29 days in arrears will be asked to repay their debt without interest and charges and will be given an option of paying off their debt over an extended period of four months.
Wonga currently offers a fixed interest rate of 365% per annum, and gives an example of £150 borrowed for 18 days attracting an interest total of £27.99.
With its "transmission fee" of £5.50, the total one-off payment for the £150 is £183.49, representative of an annual percentage rate of 5,853%.
Archbishop of Canterbury Justin Welby, who criticised the lender last year , welcomed the move but said the major issue was to create a reformed financial system.
"The big issue is to create a financial system that gives access to the poor and hope for the poorest in our lands, to be able to flourish and develop and have proper access to finance, not just for loans but for savings," he said.
"For lives in which finance is a good servant, not a bad master."
The default write-off news comes just days after the company reported a massive drop in earnings.
Wonga's annual profit dropped by 53%, after the payday lender came under fire for the tactics it uses to reclaim money from borrowers in default.
It said full-year pre-tax profit in the 12 months to 31 December was £39.7m, down from £84.5m a year earlier.
The company was criticised over its previous tactic of sending customers in default fake legal letters .
FCA director of supervision Clive Adamson said: "We are determined to drive up standards in the consumer credit market and it is disappointing that some firms still have a way to go to meet our expectations.
"This should put the rest of the industry on notice - they need to lend affordably and responsibly.
"It is absolutely right that Wonga’s new management team has acted quickly to put things right for their customers after these issues were raised by the FCA."
The announcement was made after new Wonga chairman Andy Haste completed discussions with the FCA.
Mr Haste said: "It's clear to me that the need for change at Wonga is real and urgent.
"Our regulator is determined to improve standards in consumer credit and I share that determination.
"There is much to do in order to make Wonga a sustainable and accepted business, and today’s announcement is a significant step forward in that process."
He added: "We want to ensure we only lend to those who can reasonably afford the loan in question and during my review, it became clear to me that this has unfortunately not always been the case.
"I agreed with the concerns expressed by the FCA and as a consequence of our discussions we have committed to taking these actions."