* S.Africa central bank led $1.6 bln rescue of failed lender
* Court documents show borrowers understated expenses
* Abil sometimes made loans too big for borrowers to service
* Abil paid settlement for "reckless lending" cases in 2013
By David Dolan and Tiisetso Motsoeneng
JOHANNESBURG, Aug 20 (Reuters) - Unemployed South African construction worker Daniel isn't sure how he fell so deeply in debt. All he knows is that African Bank Investments, which was bailed out this month, kept offering him money and he kept taking.
"I can't remember now, I can't remember each and every cent I spent," he said. At 62 and with a junior high school education, he admits he doesn't understand how interest works.
For years African Bank, known as Abil, made high-interest loans to millions of lower-income, black South Africans like Daniel, even when bank statements produced to obtain the loan showed they would have struggled to service their debts, according to court documents in cases brought by the bank against defaulting borrowers.
Daniel's 226,000 rand of debt ($21,300) became the South African taxpayer's problem on Aug. 10, when the central bank said it would buy Abil's 17 billion rand bad loan portfolio after the lender revealed it would make a full-year loss and needed to raise more capital for the second time in a year.
As part of the rescue, the central bank appointed a PricewaterhouseCoopers executive as Abil's curator, tasked with restructuring the bank. The curator, Tom Winterboer, declined to comment for this story.
The credit regulator has defended its oversight of Abil.
Against a backdrop of labour unrest in the mining industry and rising fuel and food prices, the regulator said some problems were beyond the bank's control.
"Consumer over-indebtedness is not only caused by reckless lending and borrowing, but also micro and macro economic factors that have a direct impact on the debt repayment capacity of consumers, some of which occur after the granting of credit," the regulator said.
South Africa's central bank governor Gill Marcus said the bank played an important role in the country's financial system by providing credit to lower income borrowers.
Reuters has examined more than two dozen court filings by the bank against defaulters at the Johannesburg High Court.
These papers reveal that it made loans to at least six people despite holding evidence that the borrowers under-reported their expenses.
Case documents obtained from another source show it also made repeated loans to a woman who had an existing court judgement against her for defaulting on another debt.
In some cases, such as Daniel's, the bank kept lending so customers could pay off existing loans, creating a vicious cycle of indebtedness.
There is no suggestion that the bank acted unlawfully, but the documents show it made loans to people it should have known were likely to have difficulty paying.
'RECKLESS LENDING' SETTLEMENT
Marcus has said Abil's problems were "largely specific" to its business model - taking few deposits, while providing credit cards and unsecured loans to the lower-paid - adding that the overall banking sector remained healthy.
The National Credit Regulator last year sought a 300 million rand fine against Abil for "reckless lending" in "at least 700 loans" where consumers had no or inadequate means to pay the loan instalments. Citing Abil's cooperation in the case, the regulator accepted a settlement figure of 20 million rand.
Abil's former Chief Executive Leon Kirkinis, who quit days before the central bank bailout, liked to say he was on a mission to lend money to those shut out by the apartheid state, the system of white minority rule that ended in 1994.
Kirkinis declined to comment.
Under his leadership, Abil cornered the low-income market, eventually lending to nearly 3 million people, in a country where nearly a third of the population, or around 18 million people, are still without bank accounts.
Abil's no-frills branches are a fixture of black townships and working class neighbourhoods and are often located near bustling taxi ranks.
On a recent weekday afternoon, customers trickled into an Abil branch near Johannesburg to meet with loan officers who sat behind a partitioned counter.
Posters in the windows advertised mobile phone deals with new loans. "Credit that works for you - apply today," one read.
In February 2012, Abil was riding high. The bank's stock was racing toward a record as investors cheered its rapid growth.
According to the court documents seen by Reuters, one middle-aged secretary was part of that growth, having taken a 120,000 rand loan. The monthly instalments of 3,786 rand swallowed about half her net salary, according to copies of her loan contract and payslips.
Abil accepted her application for a loan, which stated her expenses were only 750 rand a month, despite being given documents showing that they were several times higher - including 780 rand to another financing company and more than 2,000 rand on groceries and fast food in one month.
The woman did not return calls for comment.
The credit regulator said consumers must provide accurate information to the lender. If they do not, the bank would have a defence against a claim of reckless lending brought by the borrower.
According to case documents from another source, a 35-year-old government employee was in June 2012 judged in default by a Pretoria court for failing to pay 13,000 rand in tuition fees to her child's private school.
That default order was outstanding when she applied and received a loan from Abil in August 2012 and another one in October, documents show.
"(Lenders) won't go to jail for making a loan to someone with a default judgement or who is in arrears, but it is reckless lending," said Marilyn Williams, owner of Johannesburg debt counselling firm DC Clinic.
MISSION TO SERVE
By 2012 unsecured credit was growing at 49 percent a year in South Africa, according to the regulator, after major commercial banks increased their activity in the market a few years earlier. But the big banks started to get cautious when the economic picture worsened.
"We pulled back in 2012, not because we were in trouble, but because we could see the signs of deterioration," said Sim Tshabalala, co-chief executive of Standard Bank, Africa's biggest bank by assets.
Unlike South Africa's top lender, which has alternative sources of income such as investment banking or project finance, Abil had nowhere else to go, said Michael Treherne of asset management firm Vestact, which sold its Abil stake in 2013.
"Abil had two choices: cut back on new loans and lose business or chase profit by extending credit to people it would have otherwise avoided. It chose the latter, and that was the problem," he said.
About a third of the loans it wrote in the second half of 2012 were classified as "medium to high risk", and that ratio didn't start coming down until well into 2013.
That was in part down to former CEO Kirkinis's mission.
"We're here to serve the needs, hopes, dreams, aspirations of the majority of the people in this country," he told analysts at what turned out to be his last results presentation in May. "And whenever one navigates tough times, it's important to actually have this as your compass." ($1 = 10.5920 South African Rand) (Editing by Alexander Smith and Will Waterman)