TOKYO (Reuters) - Japan's government plans to overhaul its monitoring system targeting regional banks in efforts to raise their profitability and facilitate lending to local businesses, sources with direct knowledge of the matter told Reuters on Monday.


The Financial Services Agency hopes to improve monitoring of regional banks to determine if they provide enough lending and have sustainable business models as lenders are expected to play a key role in supporting local businesses.


FSA chief Nobuchika Mori underscored last week the need for the financial watchdog to revamp the monitoring and supervising scheme given rising challenges in the financial industry facing a dwindling population and rock-bottom interest rates.


FSA officials could not be immediately reached for comments.


Under the plan, the FSA would divide regional banks into two groups in bringing them under a new monitoring scheme, the sources said on condition of anonymity as it has not been finalised yet.


One group is targeting major regional banks with the aim of enhancing their intermediary functions so as to boost lending, the sources said.

The other is focused on smaller lenders, to help raise their profitability with sustainable business models so they revitalise niche markets and unique businesses, they said.

The groupings should not be related to the financial health of the lenders or any ongoing move to realign regional banks, they added.

(Reporting by Sumio Ito and Takahiko Wada; Writing by Tetsushi Kajimoto; Editing by Jacqueline Wong)