I think that it is working as designed. Clearing the credentials deletes the saved passwords so that it asks you again for the password again. That is exactly what is happening in the screenshot.
If this is happening with update application, that is how the feature works. Update always tries to download the application from the server that it was first installed from. To change that, delete the application from the device and install it again from the new server.
Example;
If i have already installed "CSWeb" and want to install "CSWeb1", then need to remove CSWeb application. Similarly, when i need to re-install the CSWeb, i have to remove CSWeb1.
is there a way that without removing the application we can remove the credentials.
The server url is stored in the pacakge.csds file in the application folder. If you delete that file, when you do update applications it will no longer attempt the application in that folder.