I wish to change my signature. How should I go about doing this? What
are the steps involved? Any legal formalities? Is it allowed to change
your signature on your driver's licence?

To the best of my knowledge, there is no legal requirement that you
sign your name the same way every time (especially since nobody can
sign their name exactly the same each time :). Remember that 'X' is a
perfectly legal signature.

The only time signature matching matters is if the authenticity of a
particular signature is challenged...

From findlaw.com:
Where a written contract is required, a signature by the party to be
charged -- that is, the person whom the other party wants to hold to
the contract -- is also necessary. A signature can be handwritten, but
a stamped, photocopied, or engraved signature is often valid as well,
as are signatures written by electronic pens. Even a simple mark or
other indication of a name may be enough. What matters is whether the
signature is authorized and intended to authenticate a writing, that
is, indicate the signer's execution (completion and acceptance) of it.
That means that you can authorize someone else to sign for you as
well. But the least risky and most persuasive evidence of assent is
your own handwritten signature.

On another interesting note, notaries exist to attest that signatures are 
genuine.

A very interesting page on the history of signatures:
http://www.swiss.ai.mit.edu/6.805/student-papers/fall97-papers/fillingham-sig.html

I am not a lawyer - consult one if this is a case where it matters.

The legal description of a "signature" is:

A signature is the mark of a specific individual against a specific
document at a specific time ?with a specific intent.

To answer your question, any mark you make can be considered your
signature. Many people cannot read or write so they may just put an
"X" in a signature block, which is considered their "signature". When
the U.S. was "aquiring" land from the Native Americans, most of them
could not read or write, however a simple mark (writing an "X" or any
other mark) on the documents made the "signature" legal.

When you say you want to change the signature on your license, you
would have to go to the DMV and probably apply for a new license.
Changing it on your current license would probably render the current
license invalid, but that's just a guess.

Please refer to the disclaimer regarding legal advice at the bottom of this page.

I made a drastic change in my signature about 12 years ago and there
were no repurcussions or difficulties. If you like (it would be
prudent) you can go to your bank and inform them of this and resign
signature cards to avoid any problems.