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The Cabinet gave in-principle nod to the constitution of the mechanism which will clear proposals of banks for mergers and amalgamation, he said.
The government aims to create strong and competitive banks in public sector space to meet the credit needs of the growing economy, absorb shocks and have the capacity to raise resources without depending on the state exchequer, he said.
The decision regarding creating strong and competitive banks would be solely based on commercial considerations, he added.
After the in-principle approval, Jaitley said, the banks will take steps in accordance with law and Sebi's (Securities and Exchange Board of India) requirements.
The final scheme will be notified by the central government in consultation with the Reserve Bank.