BEIJING, June 25 (Xinhua) -- China's new move to scrap the mandatory loan-to-deposit ratio (LDR) is set to help reduce the country's overall financing costs and bring it one step closer to full interest rate liberalization.

The State Council, or the cabinet, on Wednesday passed a draft amendment to China's Banking Law that gives banks more freedom to make loans by removing the 75 percent loan-to-deposit ratio.

The ratio will instead be seen as a liquidity-monitoring indicator, according to a statement released after an executive meeting chaired by Premier Li Keqiang.

The move will enable financial institutions to increase lending to agriculture and small businesses, the statement said.

Zeng Gang, with the Chinese Academy of Social Sciences, said the removal of the LDR requirement was an "inevitable result".

"As a banking liquidity indicator, mandatory LDR is falling behind the reality of banks' rising borrowing costs and cannot reflect the real liquidity conditions of the banking sector," Zeng said.

The rule has resulted in distortions in the financial market, as many banks had to rush to absorb more deposits at the end of each month to meet the requirement, he said.

The draft amendment will be tabled to the top legislature, the National People's Congress Standing Committee, for review.

China has kept the 75 percent ratio unchanged for years. Last year, the central bank expanded the definition of what constitutes a bank's deposits in a bid to release more capital for lending.

At the end of the first quarter this year, the overall LDR was 65.67 percent, much lower than the 75 percent red line set by the banking regulator.