At law, enterprises engaging in certain special business lines (e.g. labour outsourcing service, employment services, etc.) (Security Deposit Enterprise) are required to place a security deposit at a licensed bank in Vietnam (Custodian Bank) before conducting the relevant businesses (Security Deposit). The Security Deposit is subject to strict control regulations (e.g. it can only be withdrawn or released in specific cases upon being approved by a competent authority). While the term of the Security Deposit could be long (e.g. more than one year), it is not entirely clear from the law whether the Custodian Bank can establish the Security Deposit as a term deposit and apply the respective interest rate.

Supporting arguments

1)         Subject to counter-arguments discussed below, it is reasonable to argue that the Custodian Bank can apply the term deposit interest to the Security Deposit if the parties agree to establish the Security Deposit as a term deposit. This is because:

a)         According to the law, deposits may include, among other forms, non-term deposits or term deposits.[1] A term deposit is defined as the amount of money that a customer deposits with a credit institution for a specific period, as agreed upon between the customer and the credit institution, with the principle of full repayment of the principal and interest to the customer. [2]

b)         According to Article 330.1 of the Civil Code 2015,[3] a security deposit is the act of the party with an obligation to deposit a certain amount of money or precious metals, gemstones, or valuable papers into a sealed account at a credit institution to ensure the fulfillment of obligations. Thus, a Security Deposit can also be considered a deposit. However, to apply the interest rate for term deposits to the Security Deposit, the deposit period of the Security Deposit must be determined (e.g., less than 1 month, from 1 month to less than 6 months, or 6 months or more).

The regulations concerning Security Deposits do not specify the deposit period for the Security Deposit but solely outline the circumstances under which the Security Deposit may be withdrawn. Nevertheless, these regulations permit the Security Deposit Enterprise to be entitled to interest on the Security Deposit through agreements with the Custodian Bank.

Arguably, the parties may agree to establish a specific period for the Security Deposit and apply the corresponding interest rate for term deposits, on the condition that the Security Deposit Enterprise and the Custodian Bank adhere to regulations concerning the restriction of the Security Deposit (e.g., withdrawal is only permissible in cases specified by law and with the approval of the competent state authority).

c)         Article 12 of Circular 04/2022[4] also stipulates that "for term security deposits placed with credit institutions, branches of foreign banks to ensure the performance of obligations under the law, the application of interest for premature withdrawal of deposits is carried out according to the provisions in a separate document of the Government, the State Bank of Vietnam..." This provision suggests that the Security Deposit can be placed in the form of a term deposit.

d)         Although not entirely clear, the State Bank of Vietnam also has the viewpoint that the regulations on term deposits under Circular 49/2018 may be applied to the Security Deposit. [5]

Counter-arguments

2)         One can still argue that the application of a specific term to the Security Deposit is not allowed because:

a)         at law, the Security Deposit may be withdrawn in certain legal cases (for example, when a business has its license revoked, encounters difficulties, or lacks the ability to compensate laborers). Therefore, the Security Deposit can be withdrawn at any time if there is an event as specified by law, and thus, the duration of the Security Deposit cannot be determined. Consequently, the Security Deposit cannot be considered a term deposit; and

b)         the transfer of the Security Deposit from the security deposit account to place it in a term deposit by the Custodian bank does not fall under the cases specified by law for withdrawing the Security Deposit so the withdrawal and placement of a term deposit are not in compliance with the regulations on security deposits.

Evaluation of risk

3)         The risk discussed at 2 above should be low because:

a)         The law does not prohibit parties from agreeing on specific durations for the security deposit within the period when the Security Deposit is temporarily locked by the bank and does not require the Custodian Bank to keep the Security Deposit in a fixed account. Therefore, as long as the bank can ensure the Security Deposit is still temporarily locked after being converted into a term deposit, the regulations on the security deposit are still adhered to.

b)         The risk of the Security Deposit being withdrawn at any time in the event of circumstances specified by law is similar to other term deposits if the customer has the need to withdraw funds. In this case, Circular 04/2022 also clearly stipulates the treatment of premature withdrawal interest (see 1.3).

c)         The agreement on the duration of the Security Deposit does not impede the Security Deposit Enterprise from fulfilling relevant obligations related to this Security Deposit (for example, withdrawing funds prematurely to fulfill its compensation obligations).

d)         Cases of withdrawing the Security Deposit as specified by law refer to instances where the Security Deposit is withdrawn for the Security Deposit Enterprise's use, and this does not apply to situations where the bank conducts transactions to apply term deposits to the Security Deposit.

This post is written by Pham Thi Thu Trang and edited by Hoang Thi Thanh Thuy.

[1] Article 4.13 of the Law on Credit Institutions of the National Assembly dated June 16, 2010, as amended (Law on CI 2010), and Article 1.3 of Circular 07 of the State Bank of Vietnam (SBV) dated March 17, 2014, on interest rates for deposits in Vietnamese dong at credit institutions (Circular 07/2014).

[2] Article 4.1 of Circular 49 of the SBV dated December 31, 2018, regulates term deposits (Circular 49/2018).

[3] The Civil Code of the National Assembly dated November 24, 2015 (Civil Code 2015).

[4] Circular 04 of the SBV dated June 16, 2022, regulates the application of interest for premature withdrawal of deposits at credit institutions, branches of foreign banks (Circular 04/2022).

[5] https://chinhsachonline.chinhphu.vn/tien-gui-ky-quy-co-duoc-rut-truoc-han-62122.htm.