Public sector lender Bank of Baroda on Friday said the 'Alternative Mechanism' of the finance ministry has accorded in-principle approval for its merger with Dena and Vijaya Bank.

"Ministry of Finance, Department of Financial Services on 20th December 2018 has advised that the Alternative Mechanism (AM) has accorded its in-principle approval to the proposed amalgamation of Bank of Baroda, Vijaya Bank and Dena Bank," it said in a regulatory filing.

Bank of Baroda is the transferee bank, while Vijaya Bank and Dena Bank are the transferor banks in the amalgamation process, it added.

The 'Alternative Mechanism' (AM) headed by Finance Minister Arun Jaitley had decided to merge three banks with a view to create a global size lender, which will be stronger and sustainable.

Following which, the board of directors of Bank of Baroda had given in-principle approval for the proposed merger of the three state-owned lenders on September 29.

Both the other banks have also approved the merger proposal at their respective board levels.

The new entity to be formed with the merger of Bank of Baroda, Vijaya Bank and Dena Bank is expected to be operational in the beginning of the next financial year.

The merged entity will have a combined business of Rs 14.82 trillion, making it the third largest bank after SBI and ICICI Bank.

It will have better financial strength. The net NPA ratio will be at 5.71 per cent, significantly better than public sector bank (PSB) average (12.13 per cent).

The merger of these three lenders comes after India's top lender State Bank of India (SBI) merging its five subsidiary banks and taking over Bharatiya Mahila Bank last year, which has catapulted it to be among top 50 global lenders.

Shares of Bank of Baroda traded 0.30 per cent up at Rs 115.20 apiece on BSE