A mathematical model is developed to study the effect of the potential drop across the SEI layer on the growth of the SEI layer and the subsequent capacity fading in a lithium ion battery. The model assumes that the formation of the SEI layer is principally because of the diffusion and migration of lithium ions across the SEI layer. Film formation and capacity fading in a lithium ion battery is studied as a function of diffusion of lithium ions, kinetics of reaction at the interphase and potential drop across the SEI layer. Capacity loss is found to increase with increasing potential drop across the SEI layer. Capacity fade is found to be very dependent on the kinetics of the reaction as compared to diffusion. Model results are found to compare very well with experimental data.