KUALA LUMPUR, May 13 — Lenders spooked by the controversy surrounding 1 Malaysia Development Bhd (1MDB) are contemplating demanding the full settlement of a US$975-million (RM3.6 billion) loan ahead of its due date in August, according to Singapore’s Business Times.

More worrying for the state-owned investor is that the consortium led by the Deutsche Bank Singapore could trigger cascading defaults on the remainder of 1MDB’s reported RM42 billion in debt if they declare the firm to be delinquent.

The consortium’s fears are said to be prompted by “incomplete” documents that 1MDB provided as a form of security, rendering the terms of the loan unmet. This alleged breach allows the banks to rescind the loan ahead of the August due date.

The loan was secured via the US$1.103 billion that 1MDB said was being held by its Brazen Sky unit in BSI Singapore, originally from a tranche of offshore deposits it previously kept in the Cayman Islands.

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“What was earlier construed as a tightly collateralised loan is now making the banks nervous, given this controversy,” an unnamed source told the Singapore business daily.

The BT said the banks and 1MDB are currently in “intense negotiations” to prevent a recall of the loan that the Malaysian state investor took to pay Abu Dhabi's International Petroleum Investment Company (IPIC) to terminate an option to subscribe for the future listing of 1MDB's power asset, Edra Energy.

1MDB declined to comment on the matter when contacted by the Singapore business paper, as did Deutsche Bank Singapore.

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BSI Singapore is said to have engaged lawyers in anticipation of possible claims against the bank in the event the 1MDB crisis worsens while one officer who handled 1MDB’s account has been put on “gardening leave”, sources told the BT.

“If things start to develop and no one is sure what the affected parties might do, the banks need to ensure legal representation is in place to defend their position. It's a normal prudent move on their part,” one source said.

Yesterday, PKR’s Rafizi Ramli warned that 1MDB was facing an “asteroid” in the form of a RM3.6 billion loan that will expire in August. This matches the amount owed to the consortium headed by Deutsche Bank Singapore.

In a previous exposé, whistleblower website Sarawak Report alleged that 1MDB CEO Arul Kanda Kandasamy distributed falsified financial statements to various parties on the debt-laden investment firm's assets held in BSI Singapore.

In January, the Finance Ministry said 1MDB had deposited the US$1.103 billion it redeemed from its offshore account in the Cayman Islands into BSI Singapore, with the amount held in US dollars.

Explaining why the funds were not repatriated back to Malaysia, Arul Kanda told a Business Times interview in February that this was because the funds were to be used to service 1MDB's US dollar debt interest payments.

In March, Prime Minister Datuk Seri Najib Razak ordered the Auditor General and Public Accounts Committee to investigate 1MDB.

1MDB was incorporated in 2009, after the prime minister announced the decision to turn the Terengganu Investment Authority (TIA) state fund into a federal agency.

Since then, 1MDB has been dogged by negative publicity over its finances and debt, and most recently cash flow problems that saw it struggle to meet a RM2 billion loan payment.