The monastery was founded in the 15th century in an area known as Babayki, where oars were stored for timber rafting along the river. This place is located near the village of Bolshie Soli, between Yaroslavl and Kostroma. The foundation of the monastery is linked to the discovery of the icon of St. Nicholas the Wonderworker here in the 14th century, which arrived on one of the oars. Initially, the icon was placed in an oak grove to the south of the future monastery. The founder is considered to be a disciple of Sergius of Radonezh named Siluan.

Tsar Alexei Mikhailovich gifted the monastery a mill. By the early 18th century, the monastery owned extensive lands in the Kostroma province. In 1719, a fire destroyed a significant portion of the monastery's property and archives. In 1764, by the decree of Catherine the Great, the monastery was classified as supernumerary.

Nikolai Nekrasov frequently visited the Babay Monastery, as his childhood was spent nearby, on the opposite bank of the Volga, in the village of Greshnevo. The monastery is mentioned in his poem "The Grief of Old Naum."

Before the revolution, the buildings of the monastery were preserved, the main one being the Nikolsky Cathedral, built in the 19th century. In 1861 and 1867, St. Ignatius Bryanchaninov lived here, who found funds for the repair of the buildings and the construction of the church of the Iveron Icon of the Mother of God. He led a secluded prayer life, wrote well-known works, and maintained correspondence with his spiritual children. After his death in 1867, he was buried near the small hospital church of Sergius of Radonezh.

The monastery was closed in 1919, and the cathedral was blown up in 1940. The Nikolsk Church was also demolished. Some documents of the monastery were sent to Moscow and are now kept in the RGADA. During the Soviet era, a children's bone tuberculosis sanatorium was located on the site of the monastery. In 1988, before the canonization of Ignatius Bryanchaninov, his relics were transferred to the Tolga Monastery.

The monastery was revived in 1998 under the guidance of Archimandrite Boris Dolzhenko. Since 2003, Metropolitan Simon Novikov, the former Ryazan bishop, lived here until his death and burial in the monastery.

The main holiday of the monastery is the feast day of the Nativity of St. Nicholas the Wonderworker, celebrated on July 29 according to the church calendar and August 11 according to the new style.

The modern monastery cathedral is built in a style reminiscent of the churches of medieval Novgorod and does not conform to the architectural tradition of the Upper Volga.