The project would mean that banks qualify for billions of euros of initially free loans from the ECB and would get paid up to 0.4 percent of what they borrow on condition that they lend more to companies or consumers.
The program, the latest attempt to rekindle slow, if improving, lending will see the ECB release four rounds of four-year zero-rate loans to banks from June.
If it works, the plan will make it easier and cheaper for borrowers across the 19-member euro zone, although some critics pointed to the failure of earlier similar ECB schemes and the reluctance of banks to lend as the economy struggles.
Mortgage lending will be excluded.
There will be a de facto upper limit of roughly 1.7 trillion euros ($1.9 trillion) on the size of the scheme, the ECB says, although its actual size will likely be far smaller than that.
Banks will get a chance to borrow in June, September and December as well as in March 2017.
Banks in the euro zone are allowed to borrow up to 30 percent of their existing loans, which are estimated by the ECB at roughly 5.7 trillion euros.
After two years, ECB experts will test whether those banks have increased their loans, using a technical benchmark that reflects how much a bank had been lending previously.
If the banks are proven to be lending 2.5 percent or more than they were when taking the so-called TLTRO (targeted longer-term refinancing operation), then the ECB will pay them up to 0.4 percent of what they borrowed.
That rate is the same as the charge on banks that deposit money with the ECB. This rate is now negative, denoting a charge for deposits.
"Banks will pay the (refi) rate at the time of bidding - so right now, zero - and they may even get a reduction of that rate which increases with the amount of loans they grant," ECB President Mario Draghi told journalists at a news conference after a meeting of the bank's governors.
"The maximum reduction will bring the rate ... to the level of the deposit facility rate at the time of bidding," he said, as bank cut its deposit rate to -0.4 percent.
"The amount that banks can borrow is linked to the amount of loans they have," Draghi said. "So a bank that is very active in granting loans to the real economy can borrow more than a bank that concentrates on other activities."
While the announcement resulted in a rise in the shares of banks of southern countries, such as Italy, those of rivals in economically stronger neighbors such as Germany fell.
Spanish bank executives told Reuters they welcomed the move, whereas German banks were caustic in their criticism of the ECB's steps to loosen money supply, saying it would hurt savers.
And some economists are skeptical that the project will succeed, after banks' take-up of earlier similar ultra-cheap ECB loans was far lower than expected.
"They are throwing money at the banks but it's not a game changer," ING economist, Carsten Brzeski, said.
"The ECB cannot force the private sector to go to the bank to get money. Loans are already cheap. Have we seen a take-up in credit growth? No."
(Additional reporting by Arno Schuetze in Frankfurt and Jesus Aguado in Madrid; Editing by Louise Ireland)
By John O'Donnell and Francesco Canepa
