The Union Cabinet, chaired by Prime Minister Narendra Modi, granted in-principle approval for Public Sector Banks (PSBs) to amalgamate through an Alternative Mechanism (AM). The AM comprises senior ministers empowered to approve merger proposals. This enables PSBs to initiate consolidation voluntarily, subject to board-level decisions and AM approval, without requiring fresh Cabinet clearance for each merger. The move targets stronger, globally competitive banks by reducing fragmentation in the PSB sector.

India has historically maintained a large number of public sector banks, many of which are sub-scale by global standards, making them vulnerable to credit cycles, capital inadequacy, and governance weaknesses. The Alternative Mechanism (AM) for PSB amalgamation is a structural reform designed to streamline consolidation without the procedural delays of repeated Cabinet approvals. The AM is a committee of senior ministers — typically including the Finance Minister — that can evaluate and approve specific merger proposals after PSB boards pass enabling resolutions. This was the institutional framework that later enabled landmark mergers: Bank of Baroda absorbing Vijaya Bank and Dena Bank (2019), and the mega-consolidation of 2020 that reduced PSBs from 27 to 12. The rationale rests on several pillars: larger banks command better credit ratings, lower cost of funds, and greater capacity to lend to infrastructure and large industries. Consolidation also reduces competitive undercutting among state-owned lenders and improves regulatory oversight efficiency for RBI. However, critics flag risks — cultural integration challenges, branch rationalisation causing job anxiety, and the danger of concentrating NPAs within surviving entities. For UPSC, this sits at the intersection of economic reform, federalism (Centre's role in PSB governance), and financial sector regulation. For RBI Grade B, it is directly relevant to banking structure, NBFC-bank dynamics, and financial stability.