New Delhi: The Centre has decided to merge three state-run banks - Bank of Baroda, Dena Bank and Vijaya Bank - which will create the third largest lender in the country.

"It is a major economic, commercial decision," finance minister Arun Jaitley told reporters after the announcement was made.

The decision to merge the three banks will need to be approved by their board of directors. The banks' boards will shortly meet and take a decision, Jaitley added. The government will then prepare an amalgamation scheme for the banks which will need to be approved by the cabinet and Parliament, he said.

The finance minister said he expected the process to be completed in the current financial year ending March 31, 2019.

The new amalgamated bank will have a total business of more than Rs 14.82 lakh crore. "This will hopefully create a mega bank that will be sustainable," Jaitley added. The merged bank will have combined deposits of Rs 8.41 lakh crore, gross advances of 6.4 lakh crore, 9,489 branches, and 85,675 employees.

The decision to merge the three banks was taken at a meeting held under the "alternative mechanism" framework that was drawn up last year to consider consolidation in banking.

Besides Jaitley, the alternative mechanism includes defence minister Nirmala Sitharaman and railway minister Piyush Goyal.

Back in June, rumours wre rife that the loss-making Dena Bank would be merged with Baroda. as part of the drive to pair weak and strong banks in the public sector. The big surprise was to bring Vijaya Bank, a reasonably profitable bank, into proposed amalgamated entity.

Vijaya Bank chief executive officer-cum-managing director R.A. Sankara Narayan told a TV channel that he got to hear about the merger proposal only after the news conference.

Rajeev Kumar, financial services secretary, said the merger plan was part of the effort to clean up the country's banking system.

The government will continue to provide capital support to the merged bank, Kumar added.

Kumar said there was no need to amend the Bank Nationalisation Act, and the scheme of amalgamation would be tabled in Parliament.