Jaitley said the merger would create a sustainable mega-bank which would be third largest in the country.
Arun Jaitley, Finance Minister of India briefed the media and said that the merger has been conceived in such a way that the combined lender will not end up being weaker than the existing individual entities.
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.
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 proposed merger follows a similar move by the government in February previous year when it merged State Bank of India with its five subsidiary banks, helping the country's largest lender by assets increase its scale and cut expenses through synergies. Around 9,500 branches are likely to be closed during the merger.
With State Bank of India earlier acquiring five of its associate banks and Life Insurance Corporation in the process of taking over IDBI Bank, the amalgamation of Dena Bank would still leave the government with nine more banks on a weak wicket.
"Under the mechanism, Jaitley has advised the boards of the three banks to consider the proposal", financial services secretary Rajeev Kumar said, adding that it was the next logical step in strengthening the banking system.
The PSU banks are in news today ahead of merger of Bank of Baroda with Dena Bank & Vijaya Bank.
He also stated that the proposed merger will have no negative impact on the employees as well as the customers of the respective banks.
When asked about the timing of this merger amid falling value of Indian rupee, the Finance Minister said the business in government doesn't come to a standstill even if you have global challenge of high crude oil prices and strengthening of U.S. dollar.
"No employee will face any service conditions which are adverse in nature".
"Over time, this (merger) will strengthen the global positioning of Indian banks, but there will be a considerable transition period for this", said Sujan Hajra, chief economist and head of research at Mumbai-based broker Anand Rathi.
Financial Services Secretary Rajiv Kumar said bank boards of the three banks will examine the amalgamation proposal. "Real picture of Non Performing Assets (NPAs) was only known in 2015, the UPA had swept NPAs under the carpet".
As a backgrounder to the decision, Mr. Jaitley added that the PSBs were too many in number and bank lending stood at Rs. 55 lakh crore by 2014.
Pointing out that indiscriminate lending during 2008-14 was the reason for the weak health of the banking sector, the finance minister said various steps taken by the government have started showing results. "NPAs worth Rs. 8.5 lakh crore were shown to be Rs. 2 lakh crore", the Minister claimed.