If the generator is grid connected, the grid operator may require capacitor banks so that the generator can operate without depending on the grid to supply the magnetizing current that it requires. In addition, the grid operator may require the installation to supply reactive current to supply inductive loads connected to the grid.
An induction generator's magnetizing current is an inductive reactive power load on the grid. Only wound-field synchronous generators and capacitors can supply reactive power to inductive loads.
If the generator is not grid connected, it can not operate with out a capacitor bank to supply its magnetizing current.