The Statutory Liquidity Ratio (SLR) is a mandatory reserve requirement set by the central bank. It requires commercial banks to keep a certain percentage of their total deposits in the form of liquid assets — government securities, gold, or cash — before lending out the rest.
In India, the RBI sets the SLR, currently around 18% of net demand and time liabilities (NDTL). So if a bank has $100 million in deposits, it must hold at least $18 million in approved liquid assets. This money cannot be lent out to borrowers.
SLR serves two purposes: it ensures banks have enough liquidity to handle withdrawal demands and it forces banks to invest in government securities (effectively funding government borrowing). When the central bank raises SLR, less money is available for lending, tightening credit in the economy.