India's Punjab National Bank could take control of two or three small state-run banks, that could include Oriental Bank Of Commerce, Andhra Bank and Allahabad Bank, two sources familiar with the situation told Reuters.
New Delhi has been trying to merge smaller regional state-run banks with better managed larger government-owned lenders as one way to reduce bad loans that stand at more than 9 trillion Indian rupees ($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 could start the process of taking control of the banks in the next three months, according to the sources, who declined to be named, as they are not authorised to speak to the media.
PNB shares fell as much as 4% after Reuters reported the news. Its shares ended down 2.55% at 86.10 rupees on India's National Stock Exchange on Tuesday.
Allahabad Bank fell 2.6% to close at 45.15 rupees a share, while Oriental Bank of Commerce ended down nearly 1% at 95.20 rupees per share.
The Indian government is seeking to consolidate the nation's debt-burdened state banking sector.
PNB declined to comment, while the other banks did not immediately reply to an email from Reuters seeking further information.
India's finance ministry also declined to comment on the story.