The three banks will create the third largest bank in the country.
"Capital Adequacy Ratio (of the amalgamated bank) at 12.25 per cent is significantly above the regulatory norm of 10.875 per cent and the stronger amalgamated bank will be better positioned to tap capital markets", the government said.
The government had merged five associate banks and Bharatiya Mahila Bank with SBI on April 1, 2017, to catapulte the country's largest lender to among the top 50 banks in the world. Given that Dena Bank, which is among 11 banks under RBI's PCA framework, is quite small in size, they do not see its amalgamation with larger banks BoB and Vijaya Bank hurting the balance sheet of the combined entity much.
"It is a major economic, commercial decision", finance minister Arun Jaitley told reporters after the announcement was made.
"Though the consolidation move itself is negative and ushers in uncertainty, the proposed merger of Dena with stronger Vijaya is relatively better for BoB". "We have chose to merge Dena Bank, Vijaya Bank and Bank of Baroda. After the government in principle makes this opinion, it suggests to the banks to consider it and we await the bank's consideration of it", he said.
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 government owns majority stakes in 21lenders, which account for more than two-thirds of banking assets in the Asia's third biggest economy. Vijaya Bank shares traded at Rs 60.55, up Rs 0.75 and Dena Bank shares traded at Rs 19.10, with a gain of Rs 3.15 on the BSE. The Bank of Baroda's bad loan ration now stands at 12.4 percent. The Public Sector Banks will chalk out final contours and seek approval for the process from Group of Ministers. He referred to the two tranches given to the sector as part of recapitalisation.
The grapevine was working overtime Tuesday, and Uco Bank was at the centre of the speculative talk. "The UPA had swept the NPAs under the carpet, he said".
Lending during the period increased from Rs 18 lakh crore to Rs 55 lakh crore and "the nature of lending was as if there was no tomorrow, and that took toll on banks as well as on the economy", he said.
The Finance Minister further added "In the first step of consolidation, we consolidated the subsidiaries of SBI with the parent bank to create a mega global bank".