(Adds merger schedule and management comment)

By Taiga Uranaka

TOKYO, Oct 10 (Reuters) - Two Tokyo-based local lenders on Thursday confirmed plans to merge in a move that could prompt a long-awaited but slow-moving banking industry consolidation in a country beset with weak loan demand.

Tokyo Tomin Bank Ltd 8339.T and Yachiyo Bank Ltd 8409.T said they have agreed to merge in October next year by setting up a holding company. Shareholders in both banks will receive shares in the company in exchange for their stake in the two at a ratio to be determined later, the banks said.

The talks between the two were reported by media early last month, though the banks have so far only said a merger was one of the options they could consider.

The two, with combined assets worth 4.7 trillion yen ($48.4 billion), do business in the greater Tokyo metropolitan area, where top lenders like Mitsubishi UFJ Financial Group 8306.T and local banks from other regions are locked in fierce competition.

"Competition in small and medium-sized business loans are getting fierce. It's becoming a race to lower interest rates," said Akihiro Kakizaki, president of Tokyo Tomin Bank, at a news conference. "We don't want to engage in a war of attrition, but we cannot survive unless we achieve certain scale of operation," he said.

Japan's big banks, those with nationwide branch networks, underwent waves of drastic consolidation in the late 1990s and early 2000s after many of them almost sank under the weight of massive bad loans in the aftermath of the asset bubble burst. The top lenders, numbered a dozen in late 1980s, have now consolidated into three megabanks.

In contrast, about 100 local banks nationwide remained almost intact despite a challenging business environment, where lenders are awash with pension savings but cannot find enough borrowers.

There is growing speculation there are likely to be more mergers among regional banks recently as Japan's banking regulator has made clear it will closely check on the future business viability of smaller lenders, a policy widely seen as pushing for consolidation.

($1 = 97.1950 Japanese yen)

(Editing by Jeremy Laurence and Matt Driskill)

((taiga.uranaka@thomsonreuters.com)(+81-3-6441-1813)(Reuters Messaging: taiga.uranaka.reuters.com@reuters.net))

Keywords: TOKYO BANKS/MERGER