Can you swicth on capacitor banks when genset is running?

Yes
The capacitors improve the power factor of any load that has magnetics in them, such as motors, transformers and fluro lights etc.

When the capacitors are turned on it reduces the load on the generator (draws less current)

It doesn't exactly reduce the load, it evens it out. It just lowers your peaks, but also increases the valleys. The over all power is actually more due to resistive loss, but the generator avoids big spikes by draining the bank, and allowing it build up back slowly.

In any given situation, you can keep it on, even under minor loads. It will charge up and stay charged if the load is constant, not making any real difference.

Capacitors reduce the current on inductive loads (motors, transformers, ballasts etc.) by improving the power factor.

Depending on the load on a motor the power factor can run between, say, 1 and .8 (The name plate on the motor will tell you what the power factor of the motor is at full load) am motor on no load with have a very low power factor and a motor on full load will have a much higher power factor.

Resistive loads like incandescent lamps and heaters run at unity power factor or 1.0.

You can decrease the load on the generator driving it by improving the power factor of the motor with the use of a capacitor bank.

If a motor is running at 10Amps has as power factor of .6 you can decrease the current to 7.5Amps by improving the power factor to .8 (based on a motor of 415V)

If capacitors are used as a filter, they are there to even out any peaks and surges which does not reduce the load on the generator