This paper investigates the pattern and magnitude of private capital formation in relation with institutional credit at farms in different agro-climatic zones in Jammu & Kashmir state. The study help us in establishing that borrowers of institutional credit are better positioned to invest more on farm capital. Additionally, the growth of capital stock in the reference year remains higher for borrowers than non-borrowers. This implies that credit has a crucial role to generate farm capital. The regression estimates confirm that institutional credit significantly contributes to improve the capital stock on farm. These results suggest that government should play an active role to increase credit to the farmers directly. Furthermore, the location specific loan schemes are to be encouraged for specific production environments. Finally, supervised agricultural credit schemes are required to prevent the mis-utilization of institutional credit and its timely repayment

Keyword: Institutional credit; Capital formation; Mountain agriculture;