A bank employee prepares bank notes. The State Council moved to scrap a rule that caps lending by commercial banks at 75 percent of their deposits, a measure that will increase the supply of cash in the financial system. [Photo/China Daily]

The State Council, China's cabinet, moved to scrap a rule that caps lending by commercial banks at 75 percent of their deposits, a measure that will increase the supply of cash in the financial system.

It will propose amending the nation's banking law to make the limit a ratio used for reference rather than a regulatory statute, according to a statement posted to its website on Wednesday.

A system will be set up to monitor the liquidity of banks based on the ratio, it added. Changes to the law need to be approved by the Standing Committee of the National People's Congress.

Premier Li Keqiang is trying to reshape a State-run banking industry that has $29 trillion of assets, almost twice the amount of its United States counterpart. Deregulating interest rates and easing regulatory controls are part of his efforts to support long-term growth by giving markets a bigger role in the economy.

The shake-up is coming five years after the nation completed the stock market listings of the last of its dominant big-four banks, which include the Industrial & Commercial Bank of China. The law limiting lending to 75 percent of deposits has been in place since 1995.

While the loan-to-deposit level for the industry was 66 percent in March, and the China Banking Regulatory Commission eased the requirement last year by changing the method of calculation, it remains a constraint for some listed lenders. Bank of Communications Co's ratio was about 74 percent in March, while China Construction Bank Corp's was 72 percent.

Wu Xiaoling, a former central bank deputy governor, has argued that the ratio and State-imposed quotas for lending have undermined banks' abilities to manage their assets and liabilities, and led to distortions such as the use of illegally obtained deposits to boost lending.

In November, Li said that the government would make the ratio more flexible, while the banking regulator said it was seeking to revise the banking law.

The central bank has sought to reduce some of the stresses in the financial system with three reductions to the benchmark interest rate since November and two cuts in lenders' reserve requirements this year.