HDFC Bank Ltd is in preliminary discussions with private credit funds to sell a stake in its lending arm, HDB Financial Services, which is preparing for an IPO. The bank is evaluating HDB Financial's value, with five domestic credit funds each considering acquiring a 4-7 percent stake in the non-bank lender. These talks are at an early stage, and valuations are crucial for the deal to proceed.

Previously, HDFC Bank's negotiations with large investors stalled due to valuation disagreements. Some potential investors sought board seats, particularly those aiming for a significant stake of around 20 percent. Clarity on this matter remains limited.

HDFC Bank holds a 94.64 percent stake in HDB Financial, whose loan book was over Rs 90,000 crore as of March 31. The lender is seeking a valuation of 4-5 times its book value, which stood at Rs 144.52 per share for FY23, with shareholders' funds at Rs 11,437 crore. However, given the financial sector's recent valuation declines, including for leaders like Bajaj Finance, HDB Financial's desired valuation seems high in the current market.

A secondary share sale by HDFC Bank is seen as essential for price discovery before HDB Financial's IPO. RBI regulations require significant NBFCs like HDB Financial to list by October 2025. HDB Financial's IPO has been in the pipeline for several years, heavily backed by former HDFC Bank CEO Aditya Puri, who aimed for a listing before his tenure ended in October 2020.

Following new NBFC regulations from October 2022, major unlisted NBFCs must go public within three years. While Bajaj Housing has made progress towards its IPO, other companies, including HDB Financial, are moving slower, with limited discussions about the IPO, according to investment bankers.