But some small and medium-sized banks have LDR levels nearing or even higher than the line.

Zhong Hua, researcher with the Hong Kong-based Hang Seng Bank Limited, said the new move will give small and medium-sized banks more room to make loans.

"Since those banks lend mostly to small and medium-sized enterprises [SMEs], the move will help lower the financing cost of SMEs and promote their development," Zhong said.

Lian Ping, chief economist with the Bank of Communications, agreed, saying that the measure is conducive to reducing lending rates and thus the overall social financing costs.

"In terms of immediate impact, we do not think the removal of the LDR will have a material impact on loan growth," a research note from the HSBC reads.

The real constraint on bank lending is risk aversion, which meant that the willingness to lend has diminished faster relative to the demand from borrowers. Therefore more aggressive monetary policy easing is still the most effective antidote to the slowdown in lending growth, HSBC said.

"The move is another step on the path of financial reform and interest rate liberalization," it said.

Zhou Xiaochuan, governor of China's central bank, said earlier this year that there is a high likelihood that interest rate liberalization reforms will be completed by the end of this year.

With the removal of LDR reducing deposit rate competition, and hence lowering upward pressure on interest rates, HSBC said it expects an announcement removing the deposit rate cap before the year's end.