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Addressing reporters in New Delhi on Monday, Rajiv Kumar said the government has made a decision to merge Dena Bank, Vijaya Bank and Bank of Baroda (BoB) and the merger of the three banks will make this the third largest bank of the country. The newly merged entity would be the third largest bank of the country, said Financial Services Secretary Rajiv Kumar.

Finance minister Arun Jaitley said the merger will make the banks stronger and sustainable as well as increase their lending ability.

This is the third major restructuring in the public sector banking space undertaken by this government.

Other large PSU banks can also come under pressure, it said.

The three banks will continue to work independently post-merger. The government will then prepare an amalgamation scheme for the banks which will need to be approved by the cabinet of ministers and the houses of parliament, Jaitley said, adding he expected the process to be completed in the current financial year ending March 31, 2019. The first was the merger of the five associate banks of SBI with itself.

The government says the new entity will see "substantial rise in customer base, market reach, operational efficiency and wider bouquet of products and services for customers". The boards of the banks would meet separately to clear the merger.

The new amalgamated bank will have a total business of more than Rs 14.82 lakh crore. However, he assured that no employee will face any service conditions which are adverse in nature and the best of the service conditions will apply to all of them.

R.A. Sankara Narayan, Vijaya Bank CEO & MD, told a TV channel he had got to hear about the merger proposal only after the news conference.

"Though the consolidation move itself is negative and ushers in uncertainty, the proposed merger of Dena with stronger Vijaya is relatively better for BoB". The banking industry was saddled with bad loans - called non-performing assets in banking parlance - of Rs 8.50 lakh crore.

Jaitley said the government took a series of steps to tackle the NPA challenge including the Insolvency and Bankruptcy Code "which was a defining moment in creditor-debtor relationship". The net NPA ratio is highest for Dena Bank at 11 percent. After 2015, once the real picture was known through asset review by the RBI, both the govt and the RBI started taking corrective steps. "Two strong banks can absorb a third bank to create a globally competitive bank, he said".