It was recently reported that the China Banking Regulatory Commission (CBRC) is considering scrapping loan-to-deposit ratio (LDR) restrictions on banks.

I think the moment has arrived to do away with this ratio, which has outgrown its usefulness and could potentially threaten the future development of the country's financial sector.

China has required banks to maintain an LDR of 75 percent since 1995 to prevent them from over-extending credit, thus compromising their ability to repay depositors. At that time, when capital at most banks came almost exclusively from deposits, this restriction was sensible.

However, with the subsequent development of the country's financial industry, deposits are no longer banks' only source of funding. Many banks now offer a wide range of financial products and services for clients who do not want to put their money into low-yield savings accounts. As bank capital sources diversify, there is no longer the same need to keep loans so tightly linked to deposits.

What's more, the government already has a strong arsenal of tools at its disposal to curb excessive lending, such as the mandatory capital adequacy ratio and the central bank's window guidance - that is, the official guidelines banks and other financial institutions in China are obliged to follow. The Basel Accords, which outline supervision standards in the international financial market, also do not stipulate any requirements for LDRs, a strong signal that abolishing this ratio will not inflate credit risks at Chinese banks.

Maintaining current LDR requirements also gives banks higher incentives to increase their savings interest rates to attract more depositors. In recent history, it has been common for banks to offer abnormally high interest rates at the end of the month or quarter to meet this requirement - another hint that the LDR is no longer a meaningful measure to control risk, but a burden for banks.

China's mandatory LDR confuses banks as they try to price deposit rates according to market forces, a huge obstacle for the country as it moves to ease regulatory control on interest rates.

As the floating band around the government-set benchmark deposit rate gradually enlarges, the central banks is encouraging retail banks to adjust their deposit rates based on demand pressures and their own financial situation. But with the LDR still weighing on them, most banks have chosen to raise their deposit rate up to current ceiling of 10 percent above the benchmark to lure in savers, making the float band largely meaningless as a step toward liberalization.

The article is compiled by Global Times reporter Qiu Chen based on an interview with Lu Zhengwei, chief economist from Industrial Bank. opinion@globaltimes.com.cn