Gartner Inc, the research and advisory firm, expects mergers and acquisitions in public sector banks to gain momentum during the next couple of years, as the Indian government is "poised to increase" foreign holding in Indian banks and reduce its own direct ownership.

"We expect the first phase of consolidation to take place in the next two years time and the next phase in another three to four years," Gartner Inc managing vice-president John Weste said at 'BFSI Summit 2004' in Mumbai on Thursday.

A weak capital position, the government's commitment, market forces, continuous striving for building strategic alliances and partnerships and increase in non-performing assets would be some of the main drivers of consolidation, he opined.

The consolidation would help in providing better services and products, apart from widening the reach of the banks, he said.

Consequent to the new shareholding, financial services sector would go through two major periods of consolidation and rationalisation.

As a result, Indian public sector banks would be more exposed to foreign and domestic market forces, possibly under "even tighter regulatory and fiduciary control but with minimal ownership control," he said.

The government is expected to reduce its shareholding in all banks to zero, and refocus the capital into a specialised bank for development of Indian economy, he said.

The refocus would be on small to medium enterprises and industries based in the rural areas, Weste said.

However, he cautioned that "it is highly desirable for the Indian economy to maintain at least 60 per cent of the loans and advances within Indian hands while going through the consolidation phase".

The banking sector would also witness a transformation in the next five years, with an increased stress on personnel, of about 80 per cent, than technology, he said.

India would stand to gain as the country has immense manpower, which would be a "better currency" than technology.

On the business trends for the next couple of years, he said that multi-national banks would increase its presence in the country by setting up more branches, which might even service the rural sector of the country.