MYbank, which is 30-percent owned by Alibaba-linked Ant Financial Services Group, has CNY 4 billion (roughly Rs. 4,095 crores) of registered capital and will offer loans of up to CNY 5 million (roughly Rs. 5 crores), it said in a statement.
It will only be able to take in deposits when regulators approve a facial recognition technology that allow its customers to remotely open bank accounts, an Ant Financial spokeswoman told Reuters.
"MYbank is here to give affordable loans for small and micro enterprises, and we are here to provide banking services, not for the rich, but for the little guys," said Eric Jing, Executive Chairman of MYbank.
MYbank follows in the footsteps of Alibaba arch-rival Tencent Holdings Ltd, which began trial operations of its WeBank, China's first online bank, in January.
MYbank's target clientele means it will pose little immediate threat to China's big state-owned lenders, who have seen deposits eroded by Alibaba-related wealth management product Yu'e Bao, which his now China's biggest money-market fund.
The Internet bank said its lower overheads from operating online allowed it to offer more competitive interest rates, compared to the bigger banks.
Credit conditions have remained tight for SMEs, despite a series of policy easing, as banks avoid the companies worst hit by an economic slowdown. State-owned banks have also avoided customers such as farmers and smaller businesses because of the difficulties in assessing their credit worthiness and they have little to offer as collateral.
Ant Financial has said it will use its Sesame Credit arm, which analyses data from its payment processing arm Alipay and Alibaba's e-commerce sites to assess risk and price loans for MYbank customers.
Some analysts, however, said MYbank would still face risks.
"The biggest risk for them is more than likely going to be credit costs, and will they be able to properly assess the risks?" said Matthew Smith, a banks analyst at Macquarie.
"It's not clear, if they grow too aggressively, potentially the answer would be no."
© Thomson Reuters 2015