The central bank also issued draft guidelines for setting up of payment banks, which will cater to marginalised sections of society, including migrant labourers, for collecting deposits and remitting funds.
Such banks can be set up with a minimum capital of Rs 100 crore as against Rs 500 crore required for normal commercial banks, according to the guidelines.
"Both payments banks and small banks are 'niche' or 'differentiated' banks, with the common objective of furthering financial inclusion," the RBI said while issuing draft guidelines for licensing of payments banks and small banks.
The proposed small banks will provide a whole suite of basic banking products such as deposits and supply of credit, but in a limited area of operation, it said.
On the other hand, payments banks will offer a limited range of products such as acceptance of demand deposits and remittances of funds. They will have a widespread network of access points particularly in remote areas, either through their own branch network or through Business Correspondents (BCs) or through networks provided by others.
Foreign investments in these new category banks would be as per the FDI policy.
The existing non-bank pre-payment instrument issuers, non-banking finance companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives and public sector entities may apply to set up a payments bank.
In case of small banks, resident individuals with 10 years of experience in banking and finance, companies and Societies will be eligible as promoters to set up small banks.
NBFCs, micro finance institutions (MFIs), and Local Area Banks (LABs) can also opt for conversion into small banks.
"Preference will be given to professionals from banking or financial sector, NBFCs and MFIs to set up small banks, if they meet the 'fit and proper' criteria," the draft said.
Local focus and the ability to serve smaller customers will be a key criterion in licensing such banks, it said.
"The area of operations of the small bank will normally be restricted to contiguous districts in a homogeneous cluster of States/Union Territories so that the bank has the 'local feel' and culture," it said, adding, the bank may be allowed to expand in one or more states with geographical proximity.
In his Budget speech on July 10, Finance Minister Arun Jaitley had said: "RBI will create a framework for licensing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, payment banks etc. Are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force."
Earlier in April, the RBI had given in-principle approval to IDFC and Bandhan Financial Services to set up full-fledged banking operations.