The proposed small banks will provide basic banking products such as deposits and supply of credit, but in a limited area of operation.

A week after the Budget announcement, the Reserve Bank of India issued draft guidelines for setting up of 'local feel' small banks, which will disburse small-ticket loans to farmers and businesses.

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 Rs100 crore as against Rs500 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.

"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.

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."