The Bundesliga outfit were initially ready to allow the Portugal international to leave on a permanent basis for a fee of around €48m (£43m) but have since changed their stance and are now looking at a season-long loan deal.
"We would send him out on loan for maximum one year because we are convinced he can become a good and useful Bayern player," Bayern CEO Karl-Heinz Rummenigge said, as quoted on ESPN.
Manchester United and AC Milan are the two clubs to have shown interest thus far with the latter said to have been close to a move. Jose Mourinho has confirmed the Red Devils' need for a defensive midfielder, but Sanches is not the only player on his radar — Nemanja Matic and Eric Dier are also on his wish list.
The Italian giants have since distanced themselves from a move for the midfielder owing to the German outfit's demands, but AC Milan CEO Marco Fassone indicated that they could change their stance if the conditions change later in the transfer window.
"At this moment there are no negotiations," Fassone said, as quoted by Goal. "Our rapport with [Bayern CEO Karl-Heinz] Rummenigge is very good."
"We've discussed the situation a couple of times, but at this moment they have a valuation of the player that we are not prepared to match. If the situation changes in August, then we are here," he added.
According to the London Evening Standard, Blues boss Antonio Conte approached Bayern coach Carlo Ancelotti about the Portugal midfielder's availability after Chelsea's 3-2 loss to the Bavarian giants during their pre-season friendly in Singapore on Tuesday (25 July).
The Italian manager has Tiemoue Bakayoko, N'Golo Kante and Nemanja Matic at his disposal for the deep lying midfielder's role, but Matic has been linked with a move to Old Trafford. The Stamford Bridge outfit will return to the Champions League next season following a one-season hiatus and Conte is looking to bolster his squad in all positions to be able to mount a challenge on all fronts.