Generaly, AI has plenty of units later in the game.It is more dependent from size of teritory that it's holding and economy then in earlier stage of the game, but still it is good enough.

We can't expect faction that holds 3-4 provinces to field army that will give us extreme challenge(Small countries IRL don't have huge armies either). If you, human player, by then have like 10+ provinces, you will fairly easy overrun smaller factions, which is realistic.

Yes, they will have 3 stacks maybe , but with 3-4 provinces and less mercs , it wll hurt them tremendously if when they lose 1 or more.Now bigger factions, like 15+ provinces (later in the game should be 3-4-5 of them at least), will have possibility to recover from lose of 1,2,3 armies, but will take them some time, instead of just buying 2-3 stacks of merc in 1-2 turns.

So it will hurt bigger factions too,will not destroy them but they will need time to regroup.Instead of throwing another 3-4 stacks on human next turn.It makes it more realistic, at least for me.

Thats what money scripts and merc file are intend to do. To give player some options late in the game ,instead fighting unlimited hordes of AI armies.

I would suggest you to try all 3 money scripts first , probably you will find one that will be to your liking.They all have diferent approach to same issue, and i found them good.Trying to get ballance in script between factions is awfully hard and time consuming.

You can also get yourself same money cap, in script. That way you will be hurting financially too.I usually do that and it works great for me. Every soldier that i lose can hurt me quite bit that way, plus i am limited to smaller armies then

If you end up not liking any of them, then you should get into making my own or reworking existing ones.