HDB IPO: Two concerns that could hurt the HDFC Bank subsidiary’s valuation

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Subscribe to enjoy similar stories. As HDB Financial Services Ltd prepares for a nearly $1.5 billion initial public offering of shares, two key factors could potentially impact its valuation: a recent proposal to regulate banks’ group businesses and HDB’s rising bad loans. HDB Financial Services said in its draft red herring prospectus, or its IPO filing, that its parent, HDFC Bank Ltd, may have to reduce its stake in the company to below 20% if the Reserve Bank of India implements its draft proposal in the current form.

Currently, HDFC Bank, India’s biggest private lender, holds 94.36% of HDB Financial Services. RBI’s recent proposals on forms of business and prudential regulation for investments aim to remove any overlap in businesses carried out by a bank and its subsidiaries. HDB Financial Services, a non-banking financial company, and HDFC Bank offer similar products but to different sets of borrowers.

HDB primarily lends to first-time borrowers and underserved customers. While secured loans for buying products such as two-wheelers, consumer durables and gold comprise 71% of HDB’s total loan book, unsecured advances such as loans against property account for another 28.9%. Also read | Finance is not the Wild West; there is no place for cowboys here RBI has proposed allowing two years for complying with the rules once finalised, its guidelines are expected to have an impact on HDB Financial Services’s credit ratings and borrowing costs.