Dena Bank and Vijaya Bank merger talks.Raghavendra N IBT

Small size, state-owned lenders Dena Bank and Vijaya Bank have initated talks for a possible merger. The development is in line with the government's plans to go in for consolidation in the banking space. A possible merger between the two relatively smaller Public Sector Banks (PSBs) will lead to formation of a large midsized bank, ET Now reported on Friday citing sources.

The merger has been initiated keeping in mind the geographical reach of both banks, with Vijaya Bank having a strong presence in southern India, and Dena Bank well positioned in the west.

Following news of the merger, shares of Dena Bank surged over 3.7 percent to Rs 32.05 per share while the Vijaya Bank stock dropped 1.4 percent and was trading at Rs 58.90 apiece. They closed up 1.13 percent at Rs 31.25 and down 2.18 percent at Rs 58.45 respectively.

State-run bank balance sheets are under stress with mounting bad loans which have forced the government to walk the path of consolidation. In this case, even after the merger of the two banks, the entity will require capital infusion from the government because of Dena Bank's huge non-performing assets.

Dena Bank is currently under Reserve Bank India's (RBI) prompt corrective action, as the bank's first quarter NPAs stood at 17 percent of its advances.

The merger between Vijaya Bank and Dena Bank could be completed by the end of this fiscal year if the proposal is approved by the government, the Financial Express reported.

Back in August, the Central government gave in-principle approval to the merger of state-owned lenders. In a press briefing, Union Finance Minister Arun Jaitley had said that an alternative mechanism would be in place to facilitate fast-track approvals of consolidations.

Lenders considering the merger option, after notifying the stock exchanges about the plan, have to approach the alternative mechanism. The move is aimed at fast-tracking the decision-making and address consolidation-related issues in time.

On April 1, India's largest bank, State Bank of India merged its five associate banks and the Bharatiya Mahila Bank with itself. SBI now has over 500 million customers and is counted among the top 50 banks in the world. The merged entity has a deposit base of more than Rs 26 lakh crore and advances of Rs 18.50 lakh crore.