NDTV reported that Financial Services secretary Rajiv Kumar said before any further action, the approval of the proposal by the three banks is absolutely necessary.
Jaitley also clarified that no employee will face any service conditions which are adverse in nature.
"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.
"We have seen the example of the five associate banks merging with State Bank of India". The single unit will become the third largest public sector bank in the country.
Speaking on the decision of merger, Union Finance Minister Arun Jaitley said, "Government had announced in the budget that consolidation of banks was also in our agenda and the first step has been announced".
Bank of Baroda has been given one strong in the form of Vijaya Bank and one weak bank in the form of Dena Bank. "Meanwhile, given persistent structural challenges facing mid-sized banks, we continue to maintain our cautious stance (despite trading gains in the immediate term)", said Edelweiss Securities in a recent note to its investors. "That took a toll on the economy". Till then, the three banks will carry on functioning independently. "The best of the service conditions will apply to all of them".More news: Points to watch for at Pyongyang summit
However, FM did not talk about the name of the new entity and said that it will be revealed later.
The government owns majority stakes in 21lenders, which account for more than two-thirds of banking assets in the Asia's third biggest economy. Corporate loan book constitutes 60 percent of the total loan book for Bank of Baroda and only 17 percent is constituted by the retail loan book.
Dena Bank has a gross NPA ratio of 22 per cent - among the highest across the industry. In addition to poor governance, their balance sheets are disproportionately burdened with bad loans when compared to their private sector counterparts.
The grapevine was working overtime Tuesday, and Uco Bank was at the centre of the speculative talk. The government had only unearthed the NPAs which were sought to be brushed under the carpet, he added.
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.