In today’s Finshots, we break down HDB Financial Services’ long-awaited initial public offer (IPO), which opens its offer on 25^th June (Wednesday).

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The Story

In 2007, just as India’s middle class was expanding and credit demand was booming, HDFC Bank quietly spun up a new engine — one that wouldn’t be weighed down by the regulatory limits of traditional banking. It was a non-banking financial company (NBFC) called HDB Financial Services.

At the time, NBFCs were the wild west of Indian lending. They could cater to borrowers the banks ignored or folks with thin credit files, small business owners and those seeking quick cash for weddings or emergencies. HDFC Bank wanted in, but without muddying its clean, conservative books. So it built HDB as a separate horse. And for years, HDB delivered. It scaled to a loan book of over ₹90,000 crores, turned profitable early and became HDFC Bank’s shadow arm in consumer and small business lending.

Now, that arm is heading to the public markets with a ₹12,500 crore IPO, priced between ₹700 and ₹740 per share. It’s set to be India’s biggest NBFC IPO yet. And naturally, that raises a question.

Why is HDFC Bank listing its NBFC arm now?

Well, it’s partly because the regulators are nudging them to. RBI regulations recently mandated that ‘upper layer’ or big NBFCs must be publicly listed by September 2025. Additionally, looming regulations may force banks to significantly cut stakes in lending subsidiaries. Today, HDFC Bank owns 94% of HDB, and post-IPO, its stake will shrink to around 74%. So this IPO becomes an essential step to comply as well as give HDB a chance to unlock its own value.

Speaking of unlocking value, the math is simple: about ₹10,000 crores raised from the IPO is essentially a payday for HDFC Bank, which is selling part of its stake through an offer for sale (OFS). The remaining ₹2,500 crores from fresh issue will meet HDB’s capital requirements and fuel lending growth.

Now, to understand HDB’s business, you need to look at its three main segments where it lends money.

1. Enterprise Lending (40% of HDB’s loan book): Provides secured and unsecured loans to micro, small and medium enterprises (MSMEs).

2. Asset Finance (37%): Secured loans for commercial vehicles, equipment and tractors.

3. Consumer Finance (23%): Secured and unsecured loans for personal expenses, consumer goods and vehicles.

But to really understand why investors might love (or question) this IPO, let’s get under the hood of HDB’s operations.

You see, NBFCs, unlike banks, don’t accept customer deposits to lend money. Instead, they borrow from banks or markets and lend that money at higher rates, profiting from this margin. So the profitability hinges largely on two factors. How cheaply they raise capital. And how effectively they manage loan repayments.

And that’s where HDB shines.

Firstly, the parentage of HDFC Bank comes with perks, the biggest one being cheaper access to money. Banks trust the HDFC name, and by extension, trust HDB Financial, allowing it to borrow funds at relatively lower costs compared to rivals.

Secondly, HDB has cracked a tough puzzle of going rural without compromising too much on quality. Over 80% of its 1,700+ branches are in semi-urban or rural towns. Typically, loans in these regions carry higher risks, but HDB's phygital approach, cautious underwriting and diversification have kept loan defaults manageable. Its bad loans (or Gross NPAs) stand at around 2.26%. That’s reasonably healthy, though slightly higher than some top peers.

Thirdly, HDB Financial has mastered diversification. Unlike specialised NBFCs (think Muthoot Finance’s gold loans or Shriram Finance’s used-vehicle lending), HDB offers a broad credit portfolio—from personal loans to equipment financing. Think of HDB as a credit supermarket; when one product lending underperforms, another compensates, stabilising overall earnings.

This diversified model leverages India’s vast untapped credit market where only about 12% of Indians could access formal credit (as of 2021). HDB’s hyperlocal strategy positions it uniquely in this underserved segment. That’s why its loan book has grown from ₹70,000 crore as of FY23 to over ₹1 lakh crore in FY25, reflecting a compounded annual growth rate (CAGR) of 23% with profits and strong asset quality.

But this growth wasn’t all steady. When COVID struck, just like every other lender exposed to informal borrowers, HDB’s fortress began to crack. The loan book barely grew. Net profits took a hit and stayed stuck. And return on equity, a key measure of how well a company uses shareholders’ capital, dropped from 18% in FY23 to just 14% in FY25.

And this slowdown wasn't accidental but strategic. You see, HDB turned cautious, pulling back from riskier segments, tightening underwriting norms, increasing loan-loss provisions, and downsizing its staff. It sacrificed aggressive growth for safer operations.

Now, clear recovery signs are emerging. Net NPAs settled at a comfortable 1%, credit costs stayed around 2%. And its customer base has grown at a 25% CAGR in the last two years. Clearly, HDB is regaining its momentum.

But the problem could be the IPO price.

At the upper price band, the IPO values HDB at roughly ₹61,000 crores, translating to a price to book (P/BV) multiple of 3.5.

That’s largely in line with the industry average of 3.6, but well below Bajaj Finance’s 5.9 times. Bajaj commands a premium for good reason. It delivers superior returns (20% ROE, 5% return on assets compared to HDB’s 3%), grows faster and carries a lower debt-to-equity ratio.

Other NBFCs, like Shriram Finance, focus on riskier but higher margin loans, while Muthoot Finance thrives on the steady margin business of gold loans.

Compared to these specialists, HDB Financial looks a bit vanilla. A balanced, diversified lender. It doesn't chase sky-high returns but doesn’t suffer from wild swings in asset quality either. It’s banking on steady, sustainable, and inclusive growth, which is a good thing.

But does that mean that it deserves a premium valuation just because it’s owned by HDFC Bank?

Maybe, maybe not. That’s for the market to decide.

That said, there are a few risks as well. Even though asset quality has improved over time, bad loans have fluctuated between 1.9% and nearly 5% in recent years. They’ve inched up from about 1.9% to 2.2% in the last one year alone. Still low compared to many peers, but worth noting since 27% of HDB’s total loan book is unsecured. But HDB isn’t blind to this. It has been prudently keeping money set aside for potential bad loans, to cushion any impact. While this caution has slightly eaten into profits recently, it’s also a sign of responsible lending practices.

The near-term risks are clear too. Any broader economic downturn could hurt growth and cash flows. Asset quality, or managing those bad loans, is crucial too. Margins are slightly under pressure as borrowing costs rise. And with competition heating up, HDB will need to prove it can grow (from its current 2.2% market share) and improve efficiencies.

And that’s why this IPO isn’t about quick wins. It’s a long-term play on a balanced and diversified financial institution with a massive runway for growth, especially in India’s underserved credit markets. It has the size, the numbers and the story.

So will you subscribe or sit this one out? Let us know!

Until then…

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