You do have to recruit every prisoner you capture. You can see what level they are when you hover over them, and their level appear in the middle, as does their character model. They will have upgraded like every other member of your party, and you can freely upgrade them, depending on what troop tree they hail from. Click on them, and you should see an icon where you can now recruit to your party. All of the prisoners currently, your party should be listed in that area.
Click on it, and go to the prisoner section of your menu. Eventually, you should see red exclamation points appear on the Party member icon in the lower left-hand section. Instead, you need to contain them in your caravan and have them remain as your prisoners for a few days. Option wo be available and is greyed out on the party menu. After you capture them, you ca immediately have them join up with you. However, for those who want to add to their army and expand their numbers, can you recruit them? You need to do some waiting until theyre available to join your party. You have the option to sell them to into slavery, giving your army plenty of coins to make your way into the world.
A handful of them may survive battle, and when you grab them, they become your prisoner after the end of engagement. You wont kill every enemy you encounter in Mount and Blade II: Bannerlord.
