He also stated that the proposed merger will have no negative impact on the employees as well as the customers of the respective banks.
The government had earlier asked the Reserve Bank of India (RBI) to prepare a list of candidates for the merger among 21 government banks as it seeks to strengthen a banking system laden with bad debt.
A senior banker said that with the amalgamation announcement, the government may be moving a step closer to implementing the Narasimham Committee recommendation on structural reforms.
Asked about the choice of banks, Mr. Jaitley said this was the government's assessment because one of the banks [Dena Bank] had been placed under the prompt corrective action framework. "Its ability to increase and expand will be inevitable", he said.
Employees of three banks should not worry about their career in the wake of the merger announced by the government, said Finance Minister.
Dena Bank has a gross NPA ratio of 22 per cent - among the highest across the industry. Besides Jaitley, the alternative mechanism includes defence minister Nirmala Sitharaman and railway minister Piyush Goyal. The scheme of amalgamation will be tabled in Parliament.
Bengaluru-based Vijaya Bank's Managing Director and Chief Executive Officer R A Sankara Narayanan said these three banks were the best possible combination for an amalgamation.
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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.
Apart from IDBI Bank and Dena Bank, the nine other banks now under the RBI's PCA framework are Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Bank of Maharashtra, United Bank of India, Corporation Bank and Allahabad Bank.
Citing the merger of SBI'e entities, FM said that it will benefit the working conditions of the employees of smaller banks.
Jaitley blamed the UPA government for indiscriminate lending, which led to the massive rise in stressed assets in the banking sector.
The move is also expected to revive credit grow-th, which has slowed to multi-decade lows as banks struggle with bad loans.
In his presentation, Secretary Rajiv Kumar said the amount of NPAs have started declining even as recoveries have picked up pace by the state-owned banks.