Mumbai: In a move to further consolidate the public sector banks, Punjab National Bank (PNB) could take control of two or three small state-run banks, according to media reports. The next round of banking sector consolidation could include merger of Oriental Bank Of Commerce, Andhra Bank and Allahabad Bank with PNB, sources told Reuters.

PNB could start the process of taking control of the aforementioned banks in the next three months, the sources said. The government has been trying to merge smaller regional state-run banks with better managed larger government-owned

lenders as one way to reduce non-performing assets (NPAs) that stand at more than Rs 9 trillion ($130 billion), or nearly 5% of the nation’s gross domestic output.

Last year, the government engineered state-owned Life Insurance Corp’s takeover of IDBI Bank, a step to ensure that the bank with one of the highest levels of bad loans on its books is well capitalised. PNB shares fell as much as 4% after the news was reported.  Its shares ended 2.55% down at Rs 86.10 on the National Stock Exchange on Tuesday.

Even Allahabad Bank fell 2.6% to close at Rs 45.15 a share, while Oriental Bank of Commerce ended down nearly 1% at Rs 95.20 per share. The Indian government is seeking to consolidate the nation’s debt-burdened state banking sector. Last month, the government had finalised the merger of Bank of Baroda, Vijaya Bank and Dena Bank, creating the country’s third largest lender.

The concept behind these mergers is to reduce bad loans in the country’s banking sector, streamline operations and cut operating costs. Merging banks is likely going to create superior lenders which can size up to global competitors. This merger was the first step in the consolidation of the public sector banking industry as recommended by the Narasimham Committee in 1991.