Three public sector banks are set to form an unprecedented strategic alliance.

The three banks are Corporation Bank [Get Quote], Indian Bank [Get Quote] and Oriental Bank of Commerce [Get Quote]. The alliance will allow the banks to collectively build loan assets as well as fee-based businesses. They will leverage the combined strengths of their balance sheets, though the pact does not envisage any equity participation.

The combined asset base of the three banks is Rs 147,079 crore, higher than that of Punjab National Bank [Get Quote], the country's largest nationalised bank. 

State Bank of India [Get Quote], the country's largest government-owned bank, has over Rs 400,000 crore in assets. The largest bank in the private sector, ICICI Bank [Get Quote], has an asset base of close to Rs 200,000 crore.

It will also improve their pricing at a time when banks' interest margins are thinning. The plan includes sharing branches, automated teller machines and even employees.

"One bank's employee can work in another bank on deputation. Similarly, all three banks will discuss expansion plans for branches and ATMs before setting them up to exploit geographical and locational synergy," a source in Delhi said.

The boards of Corporation Bank and Indian Bank have already cleared the proposal. The Oriental Bank board will take up the issue on Friday. Next, the banks will sign a memorandum of understanding on the strategic alliance covering business, infrastructure and people.

Corporation Bank Chairman B Shambamurthy and Indian Bank CMD KC Chakrabarty declined to comment on the development. However, they did not deny it. Oriental Bank Chairman KN Prithviraj had last week told Business Standard: "It is too premature... and still at the concept stage. We can talk after September 15."

Senior bankers said the Corporation-Indian-Oriental Bank formula could be the prelude to the bigger consolidation game. Oriental Bank and Corporation Bank are listed while Indian Bank plans an initial public offer in the last quarter of the current financial year or next year. The finance ministry is aware of the proposed alliance.

Hailing the deal as the 'best in the present circumstances, when there is political opposition to bank mergers,' a banking analyst said: "Foreign airlines often enter into such arrangements. We have not seen such an initiative in the banking space. It will benefit all parties -- employees, customers and the management of banks."

Two years ago, two Mumbai-based public sector banks, Bank of India and Union Bank, had planned a mega-merger but the deal fell to stiff opposition from trade unions and combined political parties.

Finance Minister P Chidambaram has been advocating consolidation in the banking sector through mergers. However, he has made it clear that the concerned banks would have to take the decision, and the government would not force any merger.