So I was looking through the entityclasses.xml and noticed that they have a section for Bandits and NPC. If I was to remove the < that makes it disabled would Bandits and NPCs show up in the game?
Not quite. You'd also need them to show up in spawning, but yes, bandits have been available to play with for a few alphas, but they're not great ... There is no middle ground; they either stand around shooting the ground or they Deadshot you from far away.