"The boards of Vijaya Bank, Dena Bank and Bank of Baroda have been advised by the alternate mechanism (the ministerial panel) to consider the proposal (for consolidation)", financial services secretary Rajiv Kumar said at a press conference.
In October, the government set up an alternative mechanism comprising Jaitley, defence minister Nirmala Sitharaman and railways and coal minister Piyush Goyal, as an approval framework for proposals to merge state-run banks.
The new amalgamated bank will have a total business of more than Rs 14.82 lakh crore.
India's decision to merge the three banks will first need to be approved by each of their board of directors, Jaitley said, adding that the government will then prepare an amalgamation scheme.
The merger comes in following the completion of State Bank of India and its associated banks during 2017.
The move follows top lender State Bank of India past year merging with itself five of its subsidiary banks and taking over Bharatiya Mahila Bank, a niche state-run lender for women.
Finance minister Arun Jaitley.
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In a separate statement. the government said: "Leveraging of networks, low-priced deposits and subsidiaries of the three banks has the potential of yielding significant synergies for positioning the consolidated entity for substantial rise in customer base, market reach, operational efficiency, wider bouquet of products and services, and improved access for customers". The government believes that the merger will improve the operational synergy of the three banks and is part of a plan to create larger Indian lenders instead of smaller entities vying for the same business.
He also stated that the proposed merger will have no negative impact on the employees as well as the customers of the respective banks. "There are also a number of legal steps to be done", he said.
The PSU banks are in news today ahead of merger of Bank of Baroda with Dena Bank & Vijaya Bank.
He added that the government would now await the response of the banks to the proposal. "I don't see their operations anything but expanding", he said, citing the government's experience with State Bank of India (SBI). "No employee will face a service condition that is in any way adverse to his present ones". Rajiv Kumar, Department of Financial Services Secretary, announced that the decision was arrived at after meeting of the "alternative mechanism" which was set up during previous year to consider consolidation of the Indian Banking Sector. Contrarily, Vijaya Bank is performing better as it has a gross NPA ratio of 6.9 percent.
The government owns majority stakes in 21 lenders, which account for more than two-thirds of banking assets in the Asia's third biggest economy.
In a surprise move aimed at reviving the stressed banking sector through consolidation, the government on Monday proposed amalgamation of Bank of Baroda, Dena Bank and Vijaya Bank.