China on Saturday scrapped a two decade limit on the percentage of funds banks can lend out relative to deposits, state media reported.
China's commercial banking law has since its enactment in 1975 stipulated that no more than 75 percent of a bank's deposits could be offered as loans, the official Xinhua news agency said.
But the standing committee of China's National People's Congress (NPC) amended the law to remove the 75 percent loan-to-deposit cap, Xinhua reported, with the change coming into force on 1 October.
The NPC is China's Communist Party-controlled legislature.
The amendment comes after the People's Bank of China (PBoC), the central bank, announced Tuesday it was cutting benchmark interest rates and would also reduce the amount of funds banks must keep on hand, seen as a bid to boost lending and support China's faltering economy.
The PBoC also announced the elimination of a ceiling on interest rates for time deposits with a maturity of more than one year.
China has been taking steps to liberalise controls on interest rates, which experts see as a key part of further opening up the country's financial system.
China, the world's second-largest economy, has been experiencing a broad slowdown in gross domestic product growth and authorities have come under pressure to do more to support it.
The country's benchmark Shanghai stock market has recently experienced a rollercoaster ride of plunges and sharp increases, and global markets have also seen wild swings.