The same vendor issued credit for the bill, depositing the funds back.  I entered a vendor credit because I want record of the credit memo and expense (in and out),

this is fine

but how do I match the bank entry with the vendor credit which still shows a balance amount?

As suggested, on the deposit change the from account to accounts payable and use the vendor name - THEN use pay bills, select the bill the deposit made, and apply the vendor credit to pay it.

match the deposit in QB to the banking download