NEW DELHI:  Three state-run banks - Dena Bank, Vijaya Bank and the Bank of Baroda - will be merged to create the country's third-largest lender as part of efforts to revive credit and economic growth, the government announced on Monday.

This is the second such exercise in the last 18 months as in April last year, country's top lender State Bank of India merged with itself five of its subsidiary banks and taking over Bharatiya Mahila Bank, a niche state-run lender for women.

Finance Minister Arun Jaitley, who announced the plan here, said the merger will make the banks stronger and sustainable as well as increase their lending ability.

"The Alternative Mechanism made the decision today and it has been proposed to the individual bank boards to take a decision. Boards would meet and after consultation take appropriate action," IANS quoted Jaitley as saying.

"This will hopefully create another mega bank which will be sustainable. The amalgamated entity would increase banking operations and its ability to go for further consolidation.

"The consolidation will help create a strong globally competitive bank with economies of scale and enable the realisation of wide-ranging synergies," he said.

Giving the context of the merger, he said bank lending was becoming weak, hurting corporate sector investments.

Also, many banks were in a fragile condition due to excessive lending and ballooning NPAs, he said.

"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.

"No employee would face adverse service conditions due to the merger," he added.

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.

Financial Services Secretary Rajiv Kumar said bank boards of the three banks will examine the amalgamation proposal. "The merger will help improve operational efficiency and customer services."

The amalgamated bank would be the third largest bank in India and will be strong competitive lender with economies of scale, he said adding the three would have synergies for network, low-cost deposits and subsidiaries.

While the employees interest will be protected, brand equity will be preserved, he said.

Capital support to the merged entity of Dena Bank, Vijaya Bank and BoB would be ensured, he said.

The three banks will continue to work independently post merger.

The proposed merger would lead to the creation of the country's third largest banking entity in the country.

"The envisaged amalgamation will be the first-ever three-way consolidation of banks in India, with a combined business of Rs. 14.82 lakh crore, making it India’s third-largest bank," Jaitley said.

(With inputs from agencies)