By Jonathan Davies

There could be a rise in the number of people turning to loan sharks as a direct result of the crackdown on the payday loans industry, a trade body has said.

The Consumer Finance Association (CFA) said short-term lending is down 68% over the past two years since financial regulators introduced tough new measures. In its report to MPs, the CFA said 80% of payday loan applications are now rejected. But it also claimed that 4% of those turn to loan sharks.

"Our analysis of hundreds of thousands of loan applications proves that borrowers are being excluded from credit and concerns are growing for how they are filling the gap in their finances," said Russell Hamblin-Boone, chief executive of the Consumer Finance Association.

"It is time to draw a line under the attacks on short-term lenders, recognise the huge improvements in lending and accept that we have a highly-regulated, legitimate market to keep people out of the hands of unscrupulous, illegal lenders."

Citizens Advice disagreed with the CFA's suggestions. It said that tighter rules on payday loans was helping to stop people falling into spiralling debt. Between April and June, Citizens Advice said it saw a 53% drop in the number of payday loan-related problems.

"High-cost credit is not the answer to financial difficulties," said Gillian Guy, chief executive of Citizens Advice.

"All too often payday lenders were lending to people to who could not afford to repay. The 53% decrease in payday loan issues reported to Citizens Advice shows the new regulations are having a positive effect for consumers."

Peter Tutton, of StepChange debt charity, said: "Tighter regulation on payday has not made other kinds of debt worse. Firms have themselves acknowledged that the market needed to change."