This paper has analyzed the relationship between small/medium enterprises (SMEs) and financial institutions based on the results of questionnaires answered by SMEs in the Tokai and Kansai regions. With the development of telecommunication technology and progress in securities market's infrastructure, there are fewer cases in which geographical distance poses a problem in financial transactions. However, financing for SMEs is expected to remain dependent on indirect finance, i.e., financing through their major trading bank, inasmuch as it will be necessary for financial institutions to play a major role in overcoming difficulties caused by the information asymmetry. More specifically, this type of relationship banking in which periodical direct contact lends to increased knowledge about SMEs is thriving as a means to eliminate the issue of information asymmetry. This paper finds that the direct contact or communication, an integral part of relationship banking becomes difficult when banks locate far from firms.

JEL Classification: G21