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%.
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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.
“If implemented as currently drafted, we understand that our Promoter is expected to be required to decrease its ownership in our Company to less than 20% of the equity capital (or any such higher % with prior RBI approval) in order to continue offering overlapping products. Such significant decrease in ownership by our Promoter may have a material adverse impact on our business operations and share price,” HDB said in its IPO documents filed on 30 October.
“Our bank borrowings include covenants allowing banks to recall or reprice the relevant debt facilities if our Promoter’s stake in our Company falls below 51%. As a result, we may need to, among other things, access other lenders or additional sources of funding in the future for meeting our borrowing requirements, our credit ratings may be adversely impacted and our borrowing costs may increase,” it added.
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Rising bad loans
HDB Financial Services’s IPO of ₹12,500 crore will comprise both fresh issues of shares and an offer for sale by HDFC Bank, which is looking to sell shares in its NBFC arm worth up to ₹10,000 crore.
The IPO will mark the HDFC group’s first public float in six years as it rushes to meet RBI’s deadline for ‘upper layer’ non-banking financial companies to be listed by September 2025.
But the other big concern that could affect its IPO is the company’s quality of loans.
HDB Financial Services has seen its bad loans increase over the last year ever since RBI increased the risk weights on unsecured loans. While all banks and non-banks with an exposure to unsecured loans have seen an increase in non-performing assets in the unsecured loan portfolio, HDB’s rise in bad loans has been faster compared to its peer Bajaj Finance Ltd.
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HDB’s net non-performing assets rose to 0.83% at the end of September from 0.63% at the end of March. Bajaj Finance’s net NPA increased to 0.58% from 0.46% over the same period.
Meanwhile, HDB’s unsecured consumer finance book grew sharply—by 48% year-on-year to ₹22,473.8 crore at the end of September, accounting for nearly 23% of its total loan book of ₹98,624 crore.
HDB’s gross non-performing assets as a percentage of total loans stood at 2.1% at the end of September. Its return on equity stood at 16%, lower than Bajaj Finance’s 23.85%.
“Keeping pricing aside, HDB Financial’s IPO ride may not be as smooth as Bajaj Housing Finance (IPO in September),” said Geeta Kedia, senior research analyst, SPTulsian Investment Advisers. “While the market will give some discount on the RBI norms, it will keenly watch HDB’s asset quality, increasing provisions and quality of growth.”
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