State Bank of India is preparing to turn down a $1 billion loan request from Adani Enterprises intended for a $7 billion coal project in Australia, scrapping a preliminary deal signed last year, sources with direct knowledge of the move said.

The sources said India's largest bank had not yet given Adani official notice of the internal ruling, but said that was now due to be communicated to the group.

A preliminary deal struck in November, signed during a visit to Australia by Indian Prime Minister Narendra Modi, caused uproar in India, where Opposition politicians criticised the record loan to a group whose founder is perceived to be close to Modi.

State Bank of India (SBI) said then that the signed deal was a preliminary memorandum of understanding, and that it would do proper due diligence and a project appraisal before giving out any cash.

"The credit guys are not comfortable with the project," said one of the sources. "Nothing is moving on that project."

A second source said on Friday that SBI blamed poor coal prices for the decision to turn down the loan request. Many Queensland coal mines are running at a loss in an oversupplied market.

But Adani's Australian project has been hit by political and environmental opposition too, and few in the industry had expected the SBI to press ahead with what would have been the largest ever loan granted by an Indian state bank for an overseas project.

"It is a challenging project," said the second source. "The bank has to look at foreign exchange risk also."

A separate source with knowledge of the loan said Adani had been expecting a "no" from India's largest bank and had already begun talks with other lenders.

"They knew things would not go their way .... There was always a plan B, and now plan B is activated," that source said.

SBI and Adani did not respond to requests for comment.

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