This paper describes the role of Japan's regional financial institutions in SME financing and what efforts are being made by private financial institutions and the government to address their challenges. Japan's local regions are at risk of weakening due to declining birth rates and aging populations, and the government implements measures to revitalize local areas. Japanese people have a growing demand for the active role of regional financial institutions, which have essential information on the regional economy. Traditionally, regional financial institutions have focused on lending. The macroeconomic situations, such as a surplus of funds and the Bank of Japan's negative interest rates policy, have caused lending rates to continue to fall. Against this backdrop, the earnings of regional financial institutions have been on a downward trend, but lower credit costs have mitigated the deterioration in earnings until now. However, the spread of the COVID-19 in 2020 exacerbates the over-indebtedness of small and medium-sized enterprises (SMEs). There is a widespread sense of crisis that the local economy will collapse if the situation continues, and regional financial institutions will find it difficult to operate. To help companies suffering from the COVID-19 crisis and carry out regional development activities, regional financial institutions must perform new functions beyond traditional functions, while lending will continue to be an essential business for banks in the future. To help regional financial institutions engage in new businesses, the Japanese government has pushed for significant deregulation. However, for banks to effectively support SMEs, banks need to know their customers very well. Therefore there is a strong need to improve their ability constantly to assess customers' business potential.