The government will merge state-owned Vijaya Bank, Dena Bank and Bank of Baroda.
Financial Services Secretary Rajiv Kumar said boards of the three banks will examine the amalgamation proposal. "The merger will help improve operational efficiency and customer services."
Kumar said the government will continue to provide capital support to the merged bank, expected to be India's third-largest.
He said the banking sector needs reforms and the government is taking care of banks' capital needs. While the employees interest will be protected, brand equity will be preserved, he added.
Rationalisation of overseas operation in banking sector is in full swing, he said, adding the government is keen to take steps so that history isn't repeated as far as NPAs are concerned.
The move follows top lender State Bank of India last year merging with itself five of its subsidiary banks and taking over Bharatiya Mahila Bank, a niche state-run lender for women.
Announcing the plan, Finance Minister Arun Jaitley said the merger will make the banks stronger and sustainable as well as increase their lending ability.
Giving the context of the merger, he said bank lending was becoming weak, hurting corporate sector investments.
"This amalgamated entity will increase banking operations," he said.
As was in case of SBI, no employee of the three banks would have service conditions that are adverse to their present one.
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.
But these PSU banks also account for the lion's share of bad loans or NPAs plaguing the sector and need crores of rupees in new capital in the next two years to meet global Basel III capital norms.
The three banks will continue to work independently post merger.
—With inputs from PTI
