Making such bandits too powerful seems excessive. If they were that strong, they could form their own faction. And that wouldn't be bad. Let them be a neutral race with their own cities that can't be played. And give them heroes. But maybe not mega-powerful dragons, you know, for balance:cool:
I think developing a separate, viable race without the ability to play as them is a bit strange.
Why do neutrals need heroes and real cities? A lair seems quite sufficient...